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Edited Transcript of LAM.L earnings conference call or presentation 19-Sep-19 8:30am GMT

Half Year 2019 Lamprell Plc Earnings Call

DUBAI Oct 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Lamprell PLC earnings conference call or presentation Thursday, September 19, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antony Wright

Lamprell plc - CFO & Executive Director

* Christopher McDonald

Lamprell plc - CEO & Executive Director

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Conference Call Participants

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* Alexander Samuel Brooks

Canaccord Genuity Corp., Research Division - Analyst

* Daniel Slater

Arden Partners plc., Research Division - Research Analyst

* James Richard Hubbard

Numis Securities Limited, Research Division - Analyst

* James Thompson

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Christopher McDonald, Lamprell plc - CEO & Executive Director [1]

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Good morning, everyone, and welcome the Lamprell's 2019 Half Year Results Presentation. My name is Christopher McDonald, and I'm the CEO.

With me today is our CFO, Tony Wright. Before we begin, I'd like to remind the audience of the disclaimer on Slide 2 relating to forward-looking statements.

The agenda for this morning is as follows. I will review highlights from the first half of 2019, followed by an update on our operations, including commentary on our bid pipeline. I will then address progress made with respect to our strategic initiatives before handing it over to Tony to walk you through the numbers. I will then come back to the podium to say a few words on our outlook, at which time we'll open up to Q&A.

Moving to Slide 5 into our operations. Despite the expected lower levels of activity, our underlying operational performance was strong during the first half of 2019. With respect to health and safety, I am very pleased to report that our 12-month TRIR, that's the total recordable injury rate, was 0.16 for the period ending 30 June, which is top-tier and on par with our 2018 performance, which was the group's historical best.

For the year, the group had a net loss of $51.9 million on revenues of $106.4 million. The loss was primarily driven by generally low levels of activity and a $6.2 million negative contribution on the EA1 project, primarily as a result of additional costs relating to our subcontractor in Northern Ireland.

Meanwhile and as expected, the Group had a reduced net cash position of $50.2 million as of 30 June. This reflects the impact of general working capital requirements, negative operating cash flows, and CapEx outlay to improve our yards for the renewables market. Speaking of which, our enthusiasm for offshore wind has only intensified, having established ourselves in this fast-growing market.

During the period, all 60 jackets on the EA1 project were installed. Meanwhile, we are making very good progress on the Moray East project. Our bid pipeline held steady at $6.3 billion at 30 June as compared to $6.4 billion at the end of 2018. We were very busy in the first half, working on a number of proposals across our end markets of oil and gas and renewables, including opportunities in EPCI and rigs.

Many of these opportunities are nearing award and will be decided on progressively over the next 6 months. And finally, our 30 June ending backlog was $441 million and consist of work in our both of our end markets and renewables and oil and gas.

Turning to Slide 7 and with regards to EA1, all jackets have now been installed by the client, and we are in the commercial closeout phase. We incurred additional cost of $6.2 million, primarily as a direct result of our subcontractor in Belfast, who subsequently went into administration. Elsewhere, I'm pleased to report that all of our projects from Moray East to rig refurbishment to our services businesses are performing well, safely, and on schedule and budget.

Fundamentally, our operations are much improved as we emerge from a 5-year industry downturn. On Moray East, our scope of work is the supply of 48 wind turbines and substation foundations. The project is on schedule and on budget with fabrication peaking in our yards later this year, with final delivery scheduled for early Q3 2020.

As we progress with the project, it is particularly pleasing to see the improvements in productivity resulting from incorporating lessons learned from our first project, the EA1 Project; as well as incremental investments in our yards, which has improved throughput by nearly 15% to 20%. Meanwhile, we've delivered 9 rig refurbishment projects in the first half. Work scopes remain below the peak of 2014 but levels are improving, as clients seek higher spec solutions.

Moving to Page 8 into Saudi. Saudi Arabia is and remains a key tenet of our growth strategy as it's one of the largest oil and gas markets in the world with extensive low-cost reserves. Our Saudi strategy has 2 main components. Firstly, construction of the IMI yard in Saudi Arabia, in which Lamprell is a 20% shareholder, continues apace with scheduled completion in 2022. Meanwhile, the term specification and pricing of the first 2 outsourced rigs remains under discussion between IMI and their client.

Secondly, we received in the period the first scopes of work to be bid on Saudi Aramco's long-term agreement, the LTA. The volume of opportunities is as expected, and the process has been very informative for our bidding team. Naturally, we have no influence over the timing and outcome of these awards, but we anticipate decisions from early 2020.

Typical scopes of work for the LTA include EPCI of pipelines, jackets and platforms.

Turning to Page 9. Our bid pipeline remains steady at $6.3 billion. It is important to note, the way we determine the make-up of our bid pipeline remains unchanged; that is, we continue to be very disciplined as to how we identify, pursue and differentiate ourselves with respect to new business, and I'm very encouraged as to the quality of our opportunity set.

As expected, we have seen a high level of bidding activity during the first half of the year across both of our end markets of oil and gas and renewables. Many of these opportunities are scheduled for award later this year and in early 2020. These include EPCI and rig opportunities. Currently, we have about $2 billion in renewables and $4.3 billion in oil and gas. With respect to offshore wind, we are pursuing multiple opportunities, primarily in foundations in high-voltage platforms. 2 of these opportunities will be decided later this year.

In our oil and gas segment, we are bidding multiple scopes of work on the LTA and are also seeing solid interest outside Saudi for newbuild jackups as well as land rigs. There are also emerging EPC and fabrication-only opportunities from Abu Dhabi.

Moving to Slide 9 and to delivering on our strategy. As a reminder, we outlined our strategic objectives of diversifying our customer base a few years ago and set out to achieve this by: one, strengthening our position in our core markets; two, implementing our EPCI strategy; and three, expanding into new markets and geographies, leveraging our core strengths.

With respect to strengthening our position in a traditional market of newbuild jackups, we have partnered with Aramco to build a new IMI yard in Saudi, which will build 20 rigs for ARO joint venture. And lastly, we've continued to provide value for money for the wider drilling community with 9 rigs refurbished in the first half of this year. We made significant progress with respect to implementing our EPCI strategy and started to bid a number of packages on Saudi Aramco's LTA program in the period, the volume of opportunities of which has met our expectations. We are also progressing a number of EPCI opportunities in the renewables space.

With respect to expanding into new markets and geographies, we've solidified our position in the fast-growing offshore wind market with the award of our second foundations project late in 2018 and expect a number of other opportunities to be decided on later this year. Our enthusiasm for the offshore wind sector has only increased as we see a steady and growing stream of projects for the foreseeable future.

We have maintained our focus on realigning the business with our strategic objectives. This includes significant investment in building our bidding and execution teams as well as incremental investment in our yards and operational and setup to ensure we convert our pipeline of opportunities and ultimately execute those projects efficiently and cost effectively. And I believe the business now is ready to take on more work and to realize our strategic aspirations.

With that, I'd like to hand over to Tony to walk you through the numbers.

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Antony Wright, Lamprell plc - CFO & Executive Director [2]

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Thanks, Chris, and good morning, everyone. It's great to see so many people here today. My name is Tony Wright, and I'm the CFO for the Lamprell Group.

You'll see on the screen behind me, a picture of our Hamriyah facility and the yellow gantry cranes that we've recently installed, which are now working on the Moray East project. These cranes are the type of targeted investments we continue to make to improve the efficiency of our facilities.

So moving on to Slide 13 and in line with our expectations, our net loss for the first half of 2019 is $51.9 million, an increase in losses of $30 million on the same period of 2018.

Our EBITDA for the first half is negative $29.6 million compared to a negative EBITDA of $6.2 million in 2018. The loss for the first half is driven by low revenue levels, the modest additional costs on the East Anglia One project that arose from our subcontractor in Northern Ireland and an increase in overheads, upskilling the team in particular within our bidding and proposals department as previously advised.

As Chris has mentioned, the Moray East project is progressing well, but as the project only passes the 20% progress point in the second half, in line with our accounting policies, the revenues booked in the first half of the year do not add any project margin. Our revenue for the first half is $106.4 million, which is in line with our expectations on the weighting of revenue through the year and down 32% on the same period in 2018. The ramping up of the Moray East project will drive increased revenue in the second half of the year. The table on the right shows how our revenue mix for the first half of 2019 continues to be dominated by the EPCI segment with the majority being from the renewables sector.

Our services businesses continued to perform well, providing a steady flow of revenue and profit. Our net cash position has continued to reduce in line with our expectations, decreasing from $80 million at the end of 2018 to $50 million at 30th of June 2019.

I would remind you all that we successfully extended our current debt facilities through to mid-December to enable us to agree new terms. We are in an advanced stage of negotiations with our lenders on securing the new debt facilities in Q4 this year.

So the financial performance of Lamprell in the first half of 2019 was in line with our expectations, impacted by low revenue levels, timing of project to profit recognition and additional costs.

So moving now to Slide 14. This chart shows in more detail the factors that have contributed to the increased loss in the period. We incurred just over $6 million of additional costs that have arisen from ensuring successful delivery of our jackets from our subcontractor in Belfast for the East Anglia One project. In addition to that, our overall lower levels of revenue reduced our profitability. And specifically in regard to the first half of 2019, more than half of those revenues did not contribute project margin and, in particular, the renewables projects.

As we discussed in March, we have continued our investment in upskilling our teams, in particular strengthening our bidding and proposals department, although elsewhere within the group, we remain strongly focused on keeping costs under control.

This investment in our teams is critical to our ability to adequately perform against our strategic goals and continue to focus on opportunities that will help us recover the business from the downturn. Our share of the early losses from the IMI JV for the first half is $4.9 million, an increase of $2.3 million on the same period in 2018. These losses are larger than what we expected as the IMI has not yet generated any revenue yet to contribute to their overheads. The run rate for the IMI losses in the second half will be at similar levels to those seen in the first half. Included in others is the impact of IFRS 16 in the period, which was a noncash loss of $2.3 million.

So moving on to Slide 15. And this chart shows the matters that have driven the reduction in our net cash position. In line with our expectations in the first 6 months of 2019, our net cash has reduced by $30 million to $50 million. The bulk of the reduction comes from the operational cash outflows driven by the losses in the period. We have continued to monitor and manage our project working capital position carefully, and whilst the Moray East project has drawn $14 million in the first half, we have achieved strong collections on our other receivables of $22 million to offset this. The working capital draw on the Moray East project will ease as we progress towards milestones that trigger large cash inflows.

Maintaining our net cash position remains a key focus, but we do continue to make modest but important investments in our yard maintenance CapEx, such as the gantry cranes I referred to earlier, with just under $10 million spent in the first half of 2019.

Whilst we have no plans for any major CapEx spend in the near future, we will continue to invest in our facilities, should those investments enhance our productivity and deliver long-term cost reduction.

Within other cash outflows are the usual settlements of UAE end-of-service gratuities and the funding of our net finance costs.

So moving now to Slide 16. Our balance sheet remains strong with tangible net assets in excess of $300 million. Our level of debt on the 30th of June was $40 million with a further $10 million of this repaid in August when we negotiated the extension of our current debt facilities to mid-December. Our leverage levels remain low at less than 15% at 30th June. We expect to conclude our new debt facilities in early Q4. These new facilities will enable the group to move forward with confidence in our balance sheet but also allow us to add further levels of debt should we need it when our backlog starts to grow.

Within our gross cash of $90 million, $37 million of this is restricted as it is held on deposit to cash collateralized bank guarantees we have issued. We expect our net cash position to improve slightly as we move through the second half of the year as our working capital position improves.

So turning to our strategic investments. There has been no further cash contributions to the IMI in the period. And the carrying value of our investment of $43 million on the balance sheet reflects our contributions made to date and as our share of the JV losses incurred so far.

We do not expect to make any further cash contribution to the IMI in the near future. Our new pipe shop is now fully completed and commissioned, and I expect our investments in our yards and the pipe shop to be utilized far more, later this year and into next year. We continue to pursue opportunities to monetize the rig kit inventory and our in-house designed land rig, the LAM2K. Converting these assets into cash is a key focus for us.

So turning to Slide 17 and in summary, our results for the first half of 2019 are in line with our expectations in a period of low revenue levels. We do not expect a year-on-year improvement in our financial performance as despite revenue growth, 2019 revenue levels will remain below those we require to deliver a profit. Our profitability will also be affected by losses on the IMI and essential increases in overhead. Whilst our overhead has increased year-on-year as expected due to the investment we have made in our teams, we are constantly looking to reduce our cost base throughout the business and maximize our productivity.

We will also continue to make modest but targeted strategic investments in our yards as we seek efficiencies to make us more competitive. I expect our net cash to increase modestly in the second half of the year as the working capital position on the Moray East project improves.

So in conclusion, our balance sheet remains strong; and when concluded, our new bank facilities will allow us to retain our low level of gearing, but also provide a platform for us to increase our leverage when we secure new projects.

With that, I'll now hand you back to Chris for a few final words on our outlook.

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Christopher McDonald, Lamprell plc - CEO & Executive Director [3]

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Thanks, Tony. So in summary, we continue to make steady progress with respect to our strategic initiatives. Meanwhile, we've invested in our facilities and workforce to ensure delivery of our projects and to further position ourselves for new work, both in our existing business streams as well as the renewables and EPC sectors.

We expect that full year 2019 revenues to be on the -- between $275 million to $350 million with 100% coverage on the lower end. Our bid pipeline remains steady at $6.3 billion. The pipeline of opportunities are of a high quality, with many of them due to be awarded over the next 6 months. Therefore, given our existing backlog, the opportunity set which sits in front of us and our assessments as to the timing of new awards, we expect 2020 revenues to grow year-on-year with the extent of this growth contingent upon successful conversion of our bid pipeline into backlog.

In the meantime, our net cash position along with the anticipated new debt facility gives us sufficient headroom to grow in the near and medium term. As we emerge from this lengthy downturn, I am absolutely confident that the business is in a much better place, both operationally and strategically, having successfully positioned itself in our target markets of renewables and oil and gas, including both EPC and in rigs.

With that, I'd like to thank you and open up for Q&A. If you are listening remotely, please log your questions via the webcast, and we'll try to answer them as best we can. Thank you.

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Questions and Answers

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Daniel Slater, Arden Partners plc., Research Division - Research Analyst [1]

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It's Dan Slater from Arden. And I just wanted to ask, in the statement, you've talked about selling off some of the rig kits inventory. Can you give any sort of guidance as to what kind of levels of cash you might realize for those? Are we talking $5 million, $20 million? Some sort of guidance would be good.

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Antony Wright, Lamprell plc - CFO & Executive Director [2]

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Yes. I mean, the rig kit inventory is in -- that you see on Slide 16, it's there, $69 million. I mean, when we look at the opportunities, we are absolutely seeking to recover in full.

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James Richard Hubbard, Numis Securities Limited, Research Division - Analyst [3]

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James Hubbard from Numis. You mentioned just now, no more planned contributions to IMI in the immediate future. So what is the scheduling? I think you still got like $100 million -- I forget the exact number -- or thereabouts to contribute to that project planned. So no cash flow going to that JV in 2020, for example, is that what we should think of there?

And then secondly, Tony, could you say something more about the Moray East expected revenue and margin contribution in the second half of this year to the extent you can?

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Christopher McDonald, Lamprell plc - CEO & Executive Director [4]

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I'll take the first one. Tony, you can follow-up on the second part of the question. So on IMI, we've contributed $60 million of the committed $140 million of equity. And we always anticipated that $140 million to go in over 5 to 6 years. I think the next board meeting is at the end of this year, and we'll get an update as to when they expect the next cash call. We do expect some level of cash contribution in 2020, the amount and extent of which, I think remains to be seen.

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Antony Wright, Lamprell plc - CFO & Executive Director [5]

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So in terms of Moray East, I mean, the contribution from the project, it's one of the major projects that's going through the yard in the second half; it will hit the 20% threshold. I mean in terms of the margin on the project -- as you know, we don't guide on margins -- but it's performing in line with what would be a normalized level. So it's now moving into a really busy, busy phase of the project. So it will be ramping up significantly, and it's one of the key -- obviously, one of the key revenue streams that supports the movement from the $106 million to our guidance for the full year in the second half.

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James Richard Hubbard, Numis Securities Limited, Research Division - Analyst [6]

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So if I could just follow up, putting it another way. So $30 million EBITDA negative in the first half. Should we be thinking breakeven in the second half? Is that thanks to the contribution of Moray East coming in or not?

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Antony Wright, Lamprell plc - CFO & Executive Director [7]

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We don't obviously give that sort of type of detailed guidance, but the revenue levels will start to increase. And so naturally, revenues going up. A project starting to deliver margin that wasn't there before, it's certainly going to have a positive impact compared to the first half.

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James Richard Hubbard, Numis Securities Limited, Research Division - Analyst [8]

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Okay. But we've got EBITDA numbers swinging around massively because of this lack of guidance. Is it not possible to get more concrete? I mean, you must have a reasonably good idea of what you expect; and yet, consensus ends up going from plus EBITDA to minus $60 million without apparently much change because of the lack of guidance. If you could say anything more, I think it would stop that volatility in forecast numbers that's obvious.

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Antony Wright, Lamprell plc - CFO & Executive Director [9]

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Well, it's going to get better in the second half. There's no doubt about it, but it's -- because we don't guide, James, it's very difficult for us to give any hard numbers at the moment.

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James Richard Hubbard, Numis Securities Limited, Research Division - Analyst [10]

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Maybe you should guide.

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Alexander Samuel Brooks, Canaccord Genuity Corp., Research Division - Analyst [11]

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It's Alex from Canaccord. A few things. Firstly, the -- you're currently in negotiation on the renewable debt facility. Could you give us a bit more guidance on what we will find out -- what we will be finding out about that facility in the second half, basically?

And the second thing is, obviously, you're now in commercial negotiations on EA1 for closeout. Whilst there's negotiation, it would be interesting to know what the customer has said about your performance so far and how you're going into that?

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Antony Wright, Lamprell plc - CFO & Executive Director [12]

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I can maybe take the debt thing first?

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Christopher McDonald, Lamprell plc - CEO & Executive Director [13]

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You take the debt, yes.

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Antony Wright, Lamprell plc - CFO & Executive Director [14]

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So if you remember, the previous facility that we had in place was a mixture of term loan and revolving credit facility. The structure for the new debt will be similar in terms of structure. The quantums involved, obviously we're still negotiating those, but they will be of lower levels than what we had before. But still adequate for what we need to get us through the -- sort of the foreseeable future as, then, the pipeline starts to turn into backlog. And then what it will do is give us the ability to lever up if we need to as the projects come through.

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Alexander Samuel Brooks, Canaccord Genuity Corp., Research Division - Analyst [15]

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Is there likely to be an upfront cash cost associated with that or will it be a -- will it just be a -- sort of effectively a renewal?

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Antony Wright, Lamprell plc - CFO & Executive Director [16]

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There'll be a small amount upfront, upfront fee; there always is. And then obviously, the margin will reflect that as we move forward. So there will be a small upfront fee.

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Christopher McDonald, Lamprell plc - CEO & Executive Director [17]

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Yes. As far as EA1, you may have picked up in the news, I think a week or so ago or maybe a couple of weeks now, that EA1 started producing power for the first time. It is a new industry and clearly, we went up a very steep learning curve on a number of fronts in terms of cost production on the serial nature of 60 jackets, having a major subcontractor in the U.K. go into administration and getting all that out in the time allotted. And their installation campaign was a Herculean feat, if I can put it that way. And I do think that the client recognizes that. But it was tough. When you lose close to $100 million on the project, there's friction points, but I think we're both better for it and I think that we could do business again in the future.

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Alexander Samuel Brooks, Canaccord Genuity Corp., Research Division - Analyst [18]

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And just lastly. Obviously, the bid pipeline is remaining at a pretty good level. It's still a very active bid. Can you comment on the competitive level, as best as you can detect it, in those bids, given that we see all sorts of movement with various competing yards?

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Christopher McDonald, Lamprell plc - CEO & Executive Director [19]

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Yes. I mean, it's a good question. It's something that we think about on a daily basis. We probably could have added more to the bid pipeline over the last 6 months, but we didn't. We've been very, very disciplined in terms of the type of work that we go after. And really, is it real? Can we execute it? Can we make money?

And the first 2 questions, I think, are easier and in a prolonged downturn where there's a lot of stress in the industry. The third one was the -- is always the big question, is -- and we know what we can do; but the competitors, they might have a different commercial strategy than us. But all I can say is that we've been very, very disciplined in going after those opportunities that we think that we can answer all 3 of them in the affirmative.

There is pressure in the traditional oil and gas, for sure. I'm more optimistic about renewables, to be quite frank with you. But oil and gas, there's still pressure.

But I'm going to tell you here today that as long as Tony and I are sitting up in our chairs, we will continue to be disciplined. So anything that we book into backlog is quality, and that will return a reasonable return for our shareholders and for our assets.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [20]

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It's James from JPMorgan. Chris, could you possibly just give us sort of your kind of best view as it is right now in terms of the timing of the rigs for the first 2 rigs for the IMI yard? When do you think the data points or the deadlines might come in where you can get started?

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Christopher McDonald, Lamprell plc - CEO & Executive Director [21]

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It's a tough question. To be honest, we thought we'd already be working and cutting steel by now. All I can say is that we've given everything to our client, the IMI, of which we're a 20% shareholder, and the discussions are with them and their client, Aramco and ARO Drilling. I think there's pressure to produce revenue for the IMI. They awarded their first VLCC project a couple of days ago to Hyundai, which is also being outsourced. In many respects, I think that's simpler than looking at specs and 20 build -- newbuild rigs and what the requirements are in Saudi. And I think that's part of the issue, but I don't want to make any predictions at this standpoint, but there's a lot of pressure to get something done.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [22]

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And does the timing of that influence your kind of commitment to invest in IMI? Obviously, you're not putting anything in this year. Is it completely separate?

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Christopher McDonald, Lamprell plc - CEO & Executive Director [23]

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We are a committed shareholder to Saudi Arabia. It's an important tenet of our growth strategy. We will continue to view our commitment to Saudi in very long term, and we think exposure to Saudi Arabia via the IMI and via the LTA is in the best interest for all of our stakeholders.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [24]

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Great. And just one more for me, if I might. In your prepared remarks, you talked about interest in newbuild rigs. It'd be interesting to know where that's coming from, specifically. I know we've talked a little bit about Abu Dhabi, but is there anywhere -- can you talk about potentially the opportunity in Abu Dhabi, but then also is there anything else going on?

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Christopher McDonald, Lamprell plc - CEO & Executive Director [25]

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Yes, I think just a little bit about -- commentary about what we're seeing in the new -- in the jackup market. There's still a cyclical oversupply of jackups. But what you've seen is a lot of the newbuilds, those after, say, less than 10 years, are busy now. And you do see a drive for improved efficiency, increased uptime, latest technology, all these sorts of higher-spec rigs. A lot of them are now spoken for.

So you see a very big bifurcation in the market: you have the older lower-spec rigs and there's a market for that; but on the higher spec rigs, I think you see it tightening up pretty quickly. And overall, marketed rates are above 80% in a worldwide fleet. And I think if you look at the higher-spec ones and the newer ones, it's much higher than that. And I think that's where we're seeing these niche opportunities.

And a lot of that's being driven -- it's worldwide, the jackup count is rising. You've got Qatar, you've got Saudi, you've got UAE, all increasing the rig counts in our region. And then -- but you're seeing it in the Gulf of Mexico in the Mexican sector, you're seeing it in Asia. So we're cautiously optimistic on several opportunities in newbuild jackups in the next 6 to 12 months, for the first time in 5 years.

Anything else? Okay. Thank you, everyone. Appreciate it.

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Antony Wright, Lamprell plc - CFO & Executive Director [26]

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Thank you.