Edited Transcript of GMS.L earnings conference call or presentation 1-May-20 8:00am GMT

ABU DHABI May 22, 2020 (Thomson StreetEvents) — Edited Transcript of Gulf Marine Services PLC earnings conference call or presentation Friday, May 1, 2020 at 8:00:00am GMT

Good morning, ladies and gentlemen, and welcome to the 2019 Full Year Results for Gulf Marine Services.

I am Tim Summers, the Executive Chairman of GMS. And with me here in Abu Dhabi is Stephen Kersley, the Chief Financial Officer.

Before we get started, I wanted to say a few words on the announcement by Seafox of its potential offer for GMS. We publicly announced yesterday that the Board has received an unsolicited and nonbinding approach from Seafox. We are reviewing the offer with our financial advisers, and at present, we have advised shareholders to take no action. In accordance with the takeover code rules, I cannot say any more at this stage, and we’ll be not — not be commenting on the matter during Q&A.

Now on to the full year 2019 results, turning to Slide 2. I will cover the Items 1 and 2. Steve will discuss the 2019 financial results in Section 3 in more detail, and then I will summarize at the end in Section 4.

Turning to Slide 4. Clearly, any presentation from any company at the moment needs to start with the impact of COVID-19 as all businesses and all societies are operating in extraordinary circumstances at the moment. We are no different to those companies. And indeed, we have cases in all our key markets. So just running through our approach to the issues facing the company at the moment in some more detail. At the group level, the Board is meeting on a routine basis.

We have restricted travel and essentially stopped all travel throughout the company. We have analyzed the supply chain and did a critical supplier analysis. And to date, we’ve seen no material interruption in our supply chain or operations. Some things — it is true some things are operating more slowly than others, particularly around interactions with government agencies and certain deliveries of items in our supply chain, but there have been no interruptions to operations so far and no material impact.

We have clear onshore and offshore contingency plans, and the management team are operating remotely at the moment but have a daily management call as we manage through this extraordinary period. Specifically, onshore, we have reduced the size of the organization, and I will talk further about that later in the presentation. Staff are working remotely from home. We have reduced working hours, and we have reduced salaries by 25%, including the Board, whilst we’re operating remotely. And I have taken a further 15% reduction, a total of 40% reduction in salary whilst the office is working remotely. And we have stopped all business travel, as I said earlier.

Offshore, we have frozen crew rotations. In fact, just this week, we’ve managed to do our first crew rotation in Northwest Europe, where we’re able to travel with crew. We are unable to do that in other markets at the moment due to the national travel restrictions. So we have extended our offshore rotation. And thanks to all our staff offshore for their patience during this very difficult period.

We have had — unsurprisingly had cases on our vessels, cases on 2 vessels at the moment. Both remain on hire, and those vessels are being tested at the moment and in the case of one of them is going through its deep cleaning process at the moment. It is clear that this issue of COVID-19, it will be with us for some time, and we should expect more cases to occur throughout our operations and our customers’ operations, and it will become part of our daily routine. And it’s important that the clear processes that we have in place to deal with these cases become embedded in how we work on a routine basis.

Turning to Slide 6, the year 2019 in review. It was clearly an extremely busy year for GMS, for the Board and the management team and all employees at GMS. We saw material changes in governance; a focus on rebasing the costs of the business in a successful way; delivering new business and adding to the top line; an extensive and prolonged negotiation with our lenders, Steve will refer to in more detail later on; and resetting the culture of the organization with a particular focus on performance management.

It’s very important that we deliver safe and reliable operations to our customers, and safety performance was stable in 2019, and as well as operational downtime was extremely low. In fact, the last off-hire day we had for operational reasons was in March of last year.

As I mentioned, there’s been a major overhaul of Board and the senior management team from a governance perspective. We have aligned the remuneration policy of the company with performance management and put all bonuses at risk linked to performance. We’ve improved the cost position of the company. Again, Steve will talk about this in more detail shortly. We had an original target of $6 million of annualized savings and, in 2019, delivered $13 million of annualized savings, more than double the original target. We reduced the onshore headcount by 30% and have taken further steps in 2020, which I’ll refer to at the end.

2019 results. Revenue was $108.7 million; adjusted EBITDA of $51.4 million, which is just above the guidance that we gave towards the end of last year; and a big improvement in net cash flow before debt service of $41.9 million.

In terms of the fleet utilization, that was stable on the prior year at 69%. We delivered 13 years’ worth of new contracts during the year plus a further 2 years of existing contract extensions.

Turning to Slide 7. So post the 2019 year-end, just to give a quick update on current status. We agreed at the end of March, a deal in principle with our lenders to a new capital structure in the company. And the documentation is being completed as we speak, and that should be on track to complete by the 30th of June this year. That was a deal negotiated over very many months with our syndicate of 6 banks and was concluded by all parties in very difficult market circumstances at the end of March. And we certainly appreciate the support and the focus of our lenders in that negotiation.

In terms of market activity, it is certainly true that we are in extraordinary times. And we are not — as GMS, we are not immune to the market forces of both COVID-19 impact on overall energy demand in the world as well as the activities of the OPEC Plus group. However, tender activity continues to be active in the Middle East, both in terms of our national oil company customers and also EPC customers.

At the end of last year, we started the relocation of 2 of our 3 E-Class vessels that were in Northwest Europe. We relocated 2 of those to the Middle East, and they arrived safely and securely and on time in the Middle East in February. And one of those is working at the moment, and the other one is being mobilized for another client in the Middle East.

We do see continued demand within the renewables market in Northwest Europe, where we have one vessel remaining, and we have work secured for most of this year with that vessel and, indeed, for most of next year with that vessel.

And summarizing the strong contract backlog, you can see in the chart at the bottom of Page 7 that the utilization of the fleet so far this year is 76% on average, and that compares — that’s already an increase on last year’s average of 69%. And indeed, in terms of future order book, you can see the utilization of the fleet for next year, for 2021, is currently sitting at 49%. And you can see the improvement on the corresponding figures for the prior year in that table. Clearly, our continued focus is to aim to improve both of those numbers.

In terms of a trading update on Slide 8, I’m precluded from referring to 2020 guidance that we put in the market in January due to the restrictions within the takeover code. But let me turn to some facts, which I am allowed to talk about. So the first fact is that the first quarter 2020 results are ahead of our business plan. 83% of our 2020 business plan revenues are secured under contract, including contracted options. And even if you exclude the contracted options, that number is 80%, that 80% of our 2020 business plan revenues are secured under firm contracts. Those contracts are with blue chip clients where we have strong long-term relationships.

It is clear that there is some pressure in the market for short-term rate reductions. And we are in negotiation with several clients on that topic. No decision has yet been made.

And finally, we will make a commitment to update the market properly on significant developments with a trading update within the — as things develop within the restrictions of the takeover code rules as they stand.

Handing to Steve now for a detailed review of the 2019 financial results.

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Stephen Kersley, Gulf Marine Services PLC – CFO & Director [2]

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Thank you, Tim. I’ll start with Slide 10. Adjusted EBITDA was $51 million for 2019. That was down from $58 million in 2018. This has been mainly revenue driven, which is in turn driven by utilization issues in Northwest Europe, as I’ll talk about further through the presentation. But it was higher than August guidance issued at the time of management change, which was between $45 million to $48 million.

The loss for the year was $85 million. That’s $80 million higher than last year. This is mainly driven by exceptional items, in particular, a $59 million impairment that I’ll also talk about later and $6 million of restructuring costs. These mainly concern redundancies and the closure of facilities.

Cost of sales and general and admin expenses included — on Slide 10 include depreciation. They’re IFRS figures. Obviously, our cash costs are much lower than that. $35 million of depreciation is included in the figures. Our cash costs are actually down, cash OpEx plus G&A, collectively down $8 million compared to last year. That’s mainly driven by our cost savings program, which I’ll also talk about as we move through the presentation.

Turning to Slide 11. There was a significant downgrade in guidance in August at the time of management change. This was mainly driven by utilization and, in particular, utilization in Northwest Europe, where for the second half of the year, 2 of our 3 E-Class vessels located there were predominantly stacked. This reflected lower oil and gas demand and a pause in renewables activity. It also led to us making the decision to move those 2 vessels to the Middle East in quarter 1. They arrived in the Middle East in February.

Moving to the next slide. And in the second half of the year, we outperformed our expectations. We drove up utilization. And in quarter 4, the impact of the second wave of our cost savings program saved us an additional $2 million. The utilization benefits were mainly generated in the Middle East, partly with new business but also partly through managing mobilizations and vessel transfers more efficiently, thus driving revenue.

Moving to the next slide. On costs, we originally had a target set in the first half of the year of over $6 million. Over the second half of the year, we’ve taken that to total annualized cost savings of $13 million. We’re still, as Tim mentioned, pursuing further cost savings in 2020. In the second half of the year, the cost savings drive focused in particular on headcount and in particular within that on reducing senior positions. It also focused on closure of redundant facilities, particularly port facilities and offices. And it also saw the start of a rigorous process of competitive tendering and commercial renegotiation of all of our third-party spend. That drive is continuing in the current year.

Moving to the next slide. Briefly — Slide 14. G&A is moving in the right direction. We’ve seen a 30% headcount reduction in 2019. And in the second half, as I mentioned earlier, the focus was on senior and, therefore, more expensive positions. As Tim mentioned, that work is ongoing in 2020, and we’ll talk a little bit about that when we move into the outlook section that Tim will be talking to.

Moving to the next slide, Slide 15. In 2007, cost saving — our cost saving focus was focused on quick wins. As we move forward, deeper analysis is required to drive further operational efficiencies. That’s driven us to look in detail at our vessel core OpEx. This is essentially the underlying cost per day of running a vessel. It excludes costs arising from client-specific requests. It, therefore, relates mainly to crew costs, repair and maintenance costs, rental of equipment, insurance, fees and taxes and vessel communications.

And the graph shows the range of vessel core OpEx by vessel type. Not surprisingly, you’ll see that larger vessels are more expensive. But you’ll also see quite large ranges by vessel, particularly the E-Class vessel. This reflects the differential cost of operating in different jurisdictions but also does reflect efficiency issues. And our task during this year is to analyze each vessel against our own internal benchmarks so that we can further drive costs so that all vessels move to a best-in-class position.

Moving to Slide 16, this slide focuses on fleet utilization. Utilization was flat compared to 2018, but there are large underlying differences by vessel class. E-Class vessels are down. S- and K-Class are up. This reflects the fall in Northwest European demand, where 3 of our 4 E-Class vessels were situated for the whole of 2019, reflecting, in turn, low oil and gas business and the timing of renewables work. And as I mentioned earlier, that drove our decision to relocate a few vessels to the Middle East to balance off fleet better against available demand within global market.

Moving to the next slide, Slide 17. Rates fell in 2019 compared to 2018. However, most of the falls occurred during 2018. Rates have been mainly flat in 2019 and in the early part of 2020. It also reflects the conscious taking of certain small discounts on long-term contracts to lock in long-term contracts for our vessels. We now have 5 of our 13 vessels locked in on multiyear contracts of between 3 and 5 years.

Moving to the next slide, Slide 18. This looks at our revenue streams, and I guess there are 2 key themes to mention here. We have an increasing presence in the UAE, which is welcome. It balances revenue streams across our portfolio, and of course, the UAE is a core market for us. We’re still strong in Saudi, and we see Qatar as an important growth market where we have, we believe, strong relationships with key players.

It also shows a move to NOCs, Middle Eastern-based NOCs, in terms of our customer profile. And that’s important to us. That’s important to us because we believe they’re a source of stable demand, and they’re strong creditworthy customers in a region where with low production and development costs, it leaves us well positioned to maintain utilization and pricing in a time of lower — in a time of low oil prices moving forward.

Moving to the next slide. This focuses on our capital spend. We’ve stopped all nonessential CapEx, but we’re still spending what we need to upgrade and maintain the fleet. What this slide tells us is that in a non-newbuild environment, our CapEx needs are low. Given the fact that our CapEx needs are low and our tax needs are also low, the bulk of our EBITDA is, therefore, available to service interest, deleverage the business and ultimately provide returns to shareholders.

Moving to the next slide, Slide 20. There’s been a strong focus on cash flow through the year, unsurprisingly. We’ve been pulling hard on all available levers. We’ve talked already about operating costs and overheads, but we’ve also exercised considerable discipline in our capital spending. And as you’ll see from this chart, we’ve also been very active in terms of the way we’ve managed working capital. Our cash flow, therefore, available to service debt has gone up substantially, which is a performance we’re very pleased with, particularly in an environment where we’ve had to bear significant restructuring costs and revenues were significantly down.

Turning to the next slide. This is a summary balance sheet. There are 3 issues I’d like to focus on here. The main one is relating to the impairment. This was a — there was a $59 million impairment taken, the bulk of which was on 2 E-Class vessels. These were E-Class vessels, which due to their design specifications, had costs that were substantially higher than the rest of the fleet. The rest of the fleet has reasonable impairment headroom compared to — in the current oil price environment. The remainder of the impairment related to scrapping of certain old assets.

Our net debt position is stable. It’s slightly down as we’ve been servicing and slightly repaying down debt. Our working capital position, as we discussed on the previous slide, is improving as we rigorously manage our supplier position and our collections.

Moving to the next slide, Slide 22. We’re extremely pleased to announce that we now have a deal agreed with the banks. A nonbinding term sheet has been agreed. This term sheet will give us an amortization and covenant profile that the business can sustain. Critically, it will also give us access to liquidity. We’re on track to finalize documentation and execute agreements by the 30th of June.

Moving to Slide 23. This slide shows the time line for the bank negotiations. It took some time to deliver the deal. There was certainly a need to rebuild credibility and trust that had been seriously damaged with banks, that had been seriously damaged by events through 2017, ’18 and the early part of 2019. We believe we’ve done that. We’ve done that through focusing on clarity of communication, transparency and delivering on our promises. And so from September through till March, while it’s been a slow process, it’s a deal that we’re extremely pleased with. And we’re also pleased, as I say, that the relationship we have with our stakeholders is much improved compared to where it was previously.

Moving to the next slide. Slide 24, this is the forward plan for delivery of the final deal. Not much to say here. We’re on track. We’re now in a process of documenting the deal. Key commercial terms have been agreed. The remaining process, we expect to be mainly legally and approvals-driven.

And with that, I’ll hand back to Tim.

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [3]

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Thanks, Steve. So if you just turn to Slide 26. If the operator could get to Slide 26, the — I’ll just talk about the 2020 forward view and operations update.

Slide 26. All of our available vessels are on hire today. 12 of 13 vessels in the fleet are currently on hire, and we have 1 vessel being mobilized to replace another one, which is going into its dry — planned dry docking period for its last certification. Five of those vessels are on multiyear contracts.

The backlog of new business is sitting at around $240 million. And our supply chain has been robust through now 6 weeks of remote working and very limited international travel. And to repeat, we’ve seen no material interruptions in our supply chain, albeit some things are happening more slowly than before mainly in terms of dealing with certain deliveries and certain government agencies who are understandably working more slowly than normal.

83% of our business plan revenues in 2020 are already secured under contract, and that’s 80% if you exclude contracted options. There are clearly pressure on day rates. GMS is not immune to the market forces, and we are in conversation with our customers on those. And we have clear procedures in place and a clear process in place of managing COVID-19 as best we can.

Turning to costs and an update on costs in Slide 27. I am precluded from talking specific numbers at the moment regarding our progress on costs because of the takeover code restrictions. However, it is clearly a focus that the management team has had and continues to have on continuing to reduce our cost base both in terms of our G&A and optimizing that and our operating costs, as Steve referred to in the slide discussing the VCO, or vessel core operating costs, that we talked through. So we benchmark each of our vessels against key operating metrics. And we’ll use that to improve the efficiency of operations and lower the cost because in a marketplace such as we have, the competitive dynamic is very tough, as it is with many oilfield services companies, and we need to be able to compete on safe and reliable operations and low-cost operations and continue to manage that cost base as best we can.

Turning to Slide 28 as we update on G&A. You can see that, as we said earlier, we reduced onshore headcount to 79 in 2019. And further reductions have been made during 2020, a further 22% reduction during 2020. And we now have a much smaller and more efficient onshore organization.

And finally, turning to Slide 29 and summary. We continue to deliver excellent safety and operational performance. Safe and reliable operations remains the core focus of the company.

We retain our focus on low-cost operations. Cost-saving program is currently delivering ahead of plan, and we have actions in place to drive further cost improvements.

We’re strengthening our position in core markets with our backlog. You can see the delivery of utilization in 2020 is at 76%. That’s already an increase on 2019. 49% in 2021. And indeed, looking forward to 2022, we have 35% utilization for 2022. So that gives you a sense of the visibility we have to our currently contracted backlog.

It’s important we have a sustainable capital structure, and after many months of negotiations, we agreed a deal in principle with our banks, which is being legally papered now. It will be complete by the end of June.

And we continue to manage the business in a very uncertain environment. We have clear procedures in place for COVID-19, both onshore and offshore, and that will become — and has become an integral part of our business operations. And to repeat, our first quarter 2020 results are ahead of our business plan.

That ends the formal presentation. And now I’ll hand back to the operator. We’ll be more than happy to handle any questions that any of the listeners in the presentation have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Alex Brooks from Canaccord.

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Alexander Samuel Brooks, Canaccord Genuity Corp., Research Division – Analyst [2]

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I’ve got a couple of things, which I’m — one which I think will be easy and one which I think will be hard. One is, I may not have been listening closely enough, but if you could give me a little bit more commentary on the strong working capital performance last year, that would be very helpful. It might be a repetition.

And secondly, you’ve given in actually some detail the run rate of cost savings against the average achieved cost savings over the course of last year. What we — I’m struggling to work out how I get to some sort of indication of where pricing is with respect to the average levels achieved last year.

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [3]

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Thanks for the question, Alex. So on cash flow, Steve will — can reiterate that.

On the second question, can I just ask a clarification? On pricing, you’re referring to contract pricing?

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Alexander Samuel Brooks, Canaccord Genuity Corp., Research Division – Analyst [4]

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I’m referring to — I mean, basically, I’m referring to you’ve got a contract book of 76% of this year’s revenue, which obviously is — so better utilization rate is obviously — so you’ve got better utilization than last year. So I have that input. I’ve got your unit revenue. You’re telling me that you’ve experienced cost pressure through last year, but I’ve got no way of knowing where you exited the year in terms of cost pressure or any kind of commentary on that.

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [5]

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Okay. Okay. So I’ll handle that in a minute. Thank you for the clarification.

Steve, just on…

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Stephen Kersley, Gulf Marine Services PLC – CFO & Director [6]

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Just — yes. I mean, on the working capital story, Alex, it’s pretty straightforward. It’s getting the basics right. We’ve been more assiduous at collecting receivables in a prompt way from customers. And we’ve also been better, if you like, at managing credit terms with suppliers. So if you look at Slide 21, you can see the position on net working capital has improved from $24 million at the end of December to $13.6 million at the end of December — at the end of December ’18 to $13.6 million at the end of December ’19. That was mainly in the second half of the year.

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [7]

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In terms of cost, Alex. So first things first, so the cost delivered last year, if I recall the number correctly, Steve, of the $13 million overall, $5.6 million was delivered in last year. The cost savings we are talking about on an annualized basis are continuing costs. They are not one-off costs, so we would expect those to flow through. And the remainder of those costs will flow through this year, 2020.

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Stephen Kersley, Gulf Marine Services PLC – CFO & Director [8]

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Yes, correct.

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [9]

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In terms of pressure on rates, that is not an issue for 2019 results. In 2020, we have — we are in conversation with several customers on rate pressure, no different from other oilfield services companies with their customers around the world, I’m sure. And we’re in a constructive commercial conversation with those customers. No decisions have yet been made on contracted rates. And we’ll update the marketplace in terms of trading on a routine basis as best we can going forward.

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Alexander Samuel Brooks, Canaccord Genuity Corp., Research Division – Analyst [10]

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That’s really kind of — it’s a very impressive set of results.

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Operator [11]

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We currently have no questions coming through. (Operator Instructions)

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [12]

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Okay. If there are no further questions, operator…

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Operator [13]

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We have a question and coming through — sorry — from Alex Brooks from Canaccord.

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Alexander Samuel Brooks, Canaccord Genuity Corp., Research Division – Analyst [14]

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So I’ll carry on then if there’s isn’t anything else. So the other question is, obviously, you — prior to the offer from Seafox this week, you had a — and obviously, you still have outstanding the new loan facilities agreement. What — could you give a bit more flavor as to where that — is that negotiation essentially closed and it’s simply a matter of finalization? Or what the further steps are that are required to get that to…

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [15]

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Thanks, Alex. So if I understood, so the key commercial terms were all agreed in the — in principle in the announcement we made at the end of March. So the work that’s going between the end of March — the work that’s going on now between the end of March and the end of June is in preparing legal documentation for that facility and getting formal credit approval in the banks. Now obviously, the — with all of the organizations operating remotely, that’s a slower process than might normally be the case, hence the time to do that. But it’s essentially a legal driven process. The key commercial terms are all agreed.

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Alexander Samuel Brooks, Canaccord Genuity Corp., Research Division – Analyst [16]

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And that includes the warrant pricing?

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [17]

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That’s correct.

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Operator [18]

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The next question comes from James Hubbard from Numis.

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James Richard Hubbard, Numis Securities Limited, Research Division – Analyst [19]

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Just following on from Alex’ question just then. There was — the loan agreement and the liquidity availability, the debt extension seems to be independent from needing to do the equity raise. But also, there is a need to do an equity raise stated in that relevant press release, or else, I believe, interest becomes payment-in-kind interest, and there’s potential for preference share issuance. So I’m just wondering what are the mechanics around that. If you don’t do the equity raise, to what extent are preference shares envisaged being issued? Is that formalized? Or is that still kind of up in the air?

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [20]

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The key commercial terms have been agreed, James. And the concept — the whole concept of the transaction with the banks is that we are incentivized to essentially delever the company, which you would expect in a situation like this. And so there’s a ratchet on interest rate, and then — depending on the nature and timing of the equity raise. And then there is a — the issuance of warrants, again, linked to the injection of equity or not.

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James Richard Hubbard, Numis Securities Limited, Research Division – Analyst [21]

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And is there a — I think the press release implied there was an end-of-year deadline to that. Or is it more open-ended?

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Stephen Kersley, Gulf Marine Services PLC – CFO & Director [22]

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Well, it’s more complicated than that. There are — particularly with the warrants, there is an end-of-year deadline. But then in terms of the warrants actually vesting, there are a series of other contingencies that basically play out over the next 2 or 3 years, a couple of years.

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Operator [23]

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(Operator Instructions) We have no further questions, so I will hand you back to your host for any concluding remarks.

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Timothy David Summers, Gulf Marine Services PLC – Executive Chairman [24]

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Well, thank you very much, ladies and gentlemen, for listening. If there are no further questions, we’ll say thank you and terminate the call. Happy to take any other questions that people have got after the event. Thank you very much indeed.