Tidewater - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good morning and welcome to the earnings conference call for the first quarter of 2020. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session during which you can press star one if you have a question. Please note this conference is being recorded, and I will now turn it over to you, Jason Stanley. Sir, you may begin.

Jason Stanley (VP of Investor Relations)

Thank you, Brandon. Good morning, everyone, and welcome to Tidewater's Earnings Conference Call for the Quarter ended March 31st, 2020. I'm Jason Stanley, Vice President of Investor Relations for Tidewater. Thank you for your time today, knowing many of you are doing so from home. I'm joined on the call this morning by President and CEO Quintin Kneen, our Chief Accounting Officer Sam Rubio, and our General Counsel and Corporate Secretary Daniel Hudson. During today's call, we will make certain statements that are forward-looking, referring to our plans and expectations.

There are risks, uncertainties, and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any comment that we may make during today's conference call. Please refer to our most recent 10-Q for additional details on these factors.

This document is available on our website or through the SEC at sec.gov. Information presented on this call speaks only as of today, March 12, 2020, so you're advised that at any time, sensitive information may no longer be accurate at the time of any replay. Also, during the call, we'll present both GAAP and Non-GAAP financial measures. A reconciliation of GAAP to Non-GAAP measures is included in last evening's press release. And now, with that, I'll turn the call over to Quintin.

Quintin Kneen (President and CEO)

Thank you, Jason. Good morning, everyone, and welcome to the first quarter 2020 Tidewater earnings conference call. Allow me to start off by addressing the ongoing COVID-19 pandemic and Tidewater's response at both the employee and operational level. I'll then discuss some of the macro observations we're seeing as a result of the pandemic before sharing our latest outlook for 2020, our consolidated quarterly results, and then reviewing our operating segments in more detail.

Last we spoke on our fourth quarter 2019 call, I emphasized the safety and well-being of our employees has always been our highest priority and noted that due to the nature of our business, we have well-established protocols on safety and emergency communications.

As the pandemic circumstances have progressed to the current state, I'm proud to share that the entire team at Tidewater has demonstrated both the utmost professionalism and dedication to the task at hand, both aboard our fleet and those office employees sheltered onshore. Social distancing, remote working, and the rollout of new health and safety protocols have become the norm as we collectively strive to ensure every one of our employees and their families and the clients and customers they engage with remain healthy.

I thank everyone for their efforts in working together to do their part to eliminate further transmission of the virus. Beyond our employees, we have experienced a number of direct operational impacts from the pandemic. Travel restrictions, both internationally and at home, have made crew changes, where even allowed at all, much more challenging.

We've seen an increase in temporary accommodation costs due to the requirement for crews to be quarantined for typically 14 days when embarking and disembarking vessels. As the global logistics infrastructure feels the strain of a displaced workforce, our ability to access technicians and parts to support dry dockings has also been severely limited. As we look to the wider market impact, it's helpful to set up the backdrop of the OSV industry, and we've spoken about this in the past. It's hard to find an industry that has more structural challenges than the OSV industry.

Its customers are more consolidated. Its suppliers are more consolidated. It's got no real barriers to entry and even has a perverse barrier to exit. No real substitute market for the vessels, a substantial degree of operating leverage. It's capital intensive, sharply cyclical, and it's fragmented into several hundred owners around the world.

So for those of you who are still on the call, that doesn't mean a well-managed OSV company can't generate free cash flow, even in the current market environment. And the good news is, at Tidewater, we're still planning and expecting to generate free cash flow in 2020. A big part of the call today will involve walking through our path to free cash flow generation in 2020 and beyond, even given the sudden change in outlook for the industry.

Before I lay out the Tidewater response to the decrease in activity, I want to expand on the backdrop I just referred to because it provides the reasoning for the steps we are taking here at Tidewater. The sure path to not being able to generate free cash flow is not adjusting the capital invested and the shore-based footprint to the current state of the market.

Fleet size does not determine your ability to generate free cash flow. A 150-vessel company, a 100-vessel company, and a 10-vessel company can all generate free cash flow. But to accomplish this, the smaller your fleet, the higher your average specification needs to be relative to the global active fleet. You can make money with a high-spec 10-vessel fleet if you keep your shore-based costs in line and you don't try and carry idle capacity.

The higher specification boats will work, and they'll generate sufficient margins. Higher specification boats don't always get a higher day rate, but they get more work. They don't get price, but they get volume. And the operating cost is the same. You're simply increasing your active utilization. It's the same with a 100 or 150-vessel fleet.

As you get larger, the need to be much higher in spec decreases. You can make it up in fleet count, but you can't carry idle shore-based capacity or idle vessels. You can lose money quickly holding on to the belief that cash flow drain associated with keeping an idle fleet and shore-based personnel through these periods is an investment that will pay off, but vessel owners believe this because it has worked in the past.

The oil fields are accustomed to downturns that revert back to a long-term growth trendline. That is not what is happening today. The industry is shrinking, and that's okay, but investing like it's not shrinking, as demonstrated by keeping fleet and shore-based constant, is the path to the poorhouse.

Debt holders are the true equity holders in many vessel companies, and they need to make the tough decisions that named equity holders have been unwilling to make. The process of shrinking requires making decisions on the fleet to keep, the people to keep, the customers to keep, and the geographic spread. Determining the fleet to keep is fairly easy. Modern, large, fuel-efficient tonnage with the regionally required bells and whistles is second nature to most operators.

Determining the people to keep is about looking for those hardworking, ingenious, multi-hat-wearing, resourceful individuals who aren't afraid of change. The tough part is this industry is actually full of this type of individual. That is what makes shrinking hard for many companies. Determining the customers to keep is based on who treats you best.

When you're in a structurally weak subsector, as I outlined above, you work with those customers who don't abuse the natural power that exists in these situations. These customers are out there, and it's times like this that reinforce who to work with and who to avoid. Determining the geographies to focus on is based on the equipment and customers you decide on, predicated generally on where you are currently. But trying to be everywhere is the key to failure. Leveraging a scalable shore base is key to maximizing margins.

Technology is the key to scalability. The best outcome for the industry is to quickly get to a smaller set of super regional consolidators that dominate a particular geography and who leverage off of a small shore-based footprint. Historically, Tidewater has been the player that has a large average fleet that was everywhere geographically and focused on utilization.

It's a strategy that made money in a market that was always reverting to an upward-sloping mean trendline in demand. I'm not saying it earned its cost of capital, but it was a strategy that didn't lose money. Over the past 18 months, Tidewater has been moving to a scalable and more focused infrastructure. Over that time period, you have heard us talking about leveraging technology and reshaping the geographic focus. But it's a cultural change process as well as a change in business strategy and a change in management process.

Shrinking involves factors that increase the cash burn in the short run. Some factors that generate cash in the short run and, done right, will set you up to be free cash flow positive in the long run. Shrinking involves severance costs for personnel, the cost of shuttering offices, and the cost of demobilizing vessels.

It's an inherently inefficient process as fully crewed vessels without revenue or burning fuel. But there are offsetting benefits such as the working capital liquidation proceeds from asset disposals and the temporary benefit from delaying dry docks. As mentioned in the backlog, the OSV industry has its challenges, but it has a baseload of non-drilling-related work that keeps a substantial number of boats working.

The vessel industry isn't going away, but companies must demonstrate flexibility in their operations to meet the changing demand of the market or they will go away. It's a fool's errand to try and predict where vessel demand will stabilize while the market is in turmoil, but it's necessary to make some preliminary assessments. And, well, I've been on this errand for the past six years, so why stop now, right?

We anticipate global vessel activity to be down 20%-25% over the next year. That's another 400-500 vessels in excess of demand, rough estimates. Chasing that number to perfection is another fool's errand, but that's the order of magnitude we're seeing. You may recall from our previous calls, many of these vessels just went through their dry docking, so they will fight to compete with other vessels working in the market.

This leads to a quick pullback in prevailing day rates. What makes the current circumstances even more problematic than the previous unpleasantness that began in 2014 is that there are very few non-cancelable contracts this time and no non-cancelable contracts at high day rates. The last pullback was buffered by some five-year non-cancelable contracts that were cut in the summer of 2014 when rates were at their peak.

You may recall that we had a handful of such contracts that just rolled off last year, but there is no protective buffer. There is no cofferdam, as we would say, this time. So we've got to lighten the ship. That's the only way we're going to sail through this storm. You can't sail through the storm dragging a fleet of anchors. During these times, you toss stuff overboard that perhaps you wish you didn't have to toss. My objective is that by this time next year, we're down to a shop coat of primer. The vessels in the lay-up fleet that were targeted for recycling are on their way to the scrapyard.

The marginal specification vessels that we were trying to sell into secondary markets, they're going to scrap. There is, quite frankly, not enough economical lay-up capacity in the world to put all these vessels in lay-up.

Those yards are still full. Paying premium prices for lay-up capacity while deteriorating vessels are in less expensive, more equipped locations, that doesn't make sense. Someone will do it, but not us. We will be getting even more aggressive in high-grading the fleet through scrapping than we have been in the past, and we're already more aggressive than anyone else out there. This goes back to what I was discussing earlier. Get the fleet average specification up and stop carrying idle vessels. This is done by scrapping and divesting lower specification tonnage.

Prices for scrap steel are also going lower as the world doesn't need much steel today, but holding out for higher scrap prices is another mistake shipowners make. You end up paying more lay-up costs and you gain in higher scrap prices.

It's a race to the recycling yard to lower the cost of lay-up and provide some cash from the idle steel. We anticipate generating $39 million of cash from vessel disposals in 2020. We generated $10.5 million in the first quarter. We still anticipate generating $39 million of cash in 2020 from vessel disposals, but more vessels will likely be sold to reach that amount. You will notice that we wrote down the value of the available for sale fleet by $10 million in the first quarter to reflect this new reality.

And as we go through the second quarter, we will be making the determination of which vessels we've moved into the asset held for sale category. On our fourth quarter 2019 call, we announced backlog of $440 million for work in 2020.

Since that time, the effects of the demand reduction and oil price-driven CapEx reductions have resulted in approximately $63 million in reduced backlog from early contract terminations and $8 billion in reduced backlog from delays of getting vessels back on hire because the vessels are in shipyards that are shut down to virus containment-related delays. So summed up and deducting the first quarter revenue of $116 million, that leaves backlog for the remainder of 2020 at $253 million.

Our primary backlog risk comes from those vessels doing drilling support work. As stated previously, production support is expected to remain relatively stable, although shut-ins of offshore production platforms may cause additional cancellations should the oversupply of oil worsen.

The vessel spot market has all but disappeared for the year, so we anticipate a significantly smaller part of our revenue for the remainder of 2020 will come from this market than we would typically see. All told, we anticipate a revenue loss of approximately $100 million in 2020, $63 million in cancellations, $8 million in dry dock delays that slip into 2021, and the elimination of $29 million of spot market work. With that revenue loss is approximately $45 million of operating profit.

In addition, we are looking at approximately $13 million of costs associated with deactivating those vessels coming off hire and additional lay-up costs. On the frictional cost side, that is the cost associated with shrinking the shore base and the pandemic-driven inefficiencies, we are estimating those costs to be $7 million for the remainder of 2020.

That's $65 million less in cash than we anticipated at the beginning of the year. Offsetting that, we will be spending $20 million less in dry docks, and I anticipate approximately $30 million in additional working capital liquidation. Accordingly, we see the net impact on 2020 as a decrease in free cash flow of $15 million. At a very summary level, for the full year 2020, we are anticipating revenue of approximately $395 million, with $116 million recognized in the first quarter, $253 million in backlog, and $36 million anticipated to be booked based on options in existing contracts. The revenue is at a gross margin of 35%, so $138 million from core operations. Take from that the $13 million of frictional costs of vessels going into lay-up and the $7 million of pandemic inefficiencies, and you're down to $118 million.

Take $81 million off for general and administrative expenses, and you're down to $37 million. Dry docks at $33 million gets you down to $4 million. Then we have the proceeds from asset disposals of $40 million, working capital liquidation of $30 million, and taxes and other of a negative $9 million. All summed up, that's $65 million of free cash flow. Very high level, and it's down from the $80 million we anticipated as of the beginning of the year. We also have $18 million of net interest expense and $10 million of principal payments.

For those of you who think you should include those numbers in determining free cash flow cadence. So what do we have to do different to meet these estimates? We have to stop doing dry docks. We have to quickly lay-up and decrew idle vessels.

We have to collect what is due to us from large multinationals and national oil companies, and we have to sell vessels. All achievable. Of course, there are risks to these estimates, so let me walk you through what I see as the bigger risk. As you may expect, our customers are requesting rate reductions where possible, which is the same process we went through during the previous downturn. This time, there is very little movement to make, if any. Our customers appear to understand that these cost savings cannot come from their supply chain this time, but downward pressure on prices continues regardless.

We have factored all of this into our $100 million estimated decrease in 2020 revenue, along with the absence of any real spot market and vessel cancellations. Operational expenses are slightly higher due to the previously mentioned logistical challenge we have had to make associated with the quarantine periods for mariners.

When vessels complete contracts and come off-hire, we are moving as swiftly as possible to lay-up the vessel and decrew, minimizing any ongoing costs in the absence of revenue generation. We believe we have a good understanding of these costs today, but within the global shipping industry, not just the OSV industry, there are approximately 150,000 mariners around the world who are awaiting a crew change.

And on that note, I believe the International Chamber of Shipping is doing an excellent job working with authorities on this issue. There may be other costs that we do not anticipate, but we have factored in $20 million of additional frictional costs, and we are comfortable with this estimate based on everything we know today.

Stopping dry dock activity is a typical lever shipping companies pull during times like these. In the OSV industry, we all did this in the 2015 to 2017 time period, and as we have discussed on previous calls, that resulted in an enormous wave of dry docks and deferred maintenance from 2018 until now. The build cycle amplified this, but here we are again. We can delay dry docks, and we will, but we can't stop dry docks. We will look to catch up in later years, but the savings in 2020 are achievable.

We spent $25 million of our $53 million 2020 dry dock budget in the first quarter, which was all according to plan. The brakes are on all dry docks there now, but it's a bit like the brakes on a boat. It doesn't stop as quickly as you would expect from a road vehicle.

We've got vessels and yards that are in pieces. That is, the boats are in pieces, literally, and the yards are in pieces figuratively as they can't get people or technicians on location to complete the work due to virus-related travel restrictions. We anticipate another $8 million of dry dock costs in the second quarter as this work comes to an end and no dry dock spend in the third and fourth quarters. Accordingly, we anticipate a $20 million savings in 2020 from the deferral of dry dock spending, and again, we feel comfortable with this estimate.

We have been building working capital over the past six months, and I anticipate that we will significantly liquidate this balance as we go through the remainder of 2020. The substantial majority of our accounts receivables and of our long-dated accounts receivables are with super majors and national oil companies.

It's frustrating when industries with the wherewithal to pay do not pay timely, but we're currently not concerned about the collectibility of the outstanding balance, and we feel comfortable in our estimation of achieving $30 million of liquidation in 2020. Part of the liquidation is correcting for the build over the past six months, and the remainder will be the natural decrease that comes from a decrease in activity. We have $39 million forecasted for proceeds from vessels disposals.

We sold nine vessels for $9.5 million in the first quarter. We received another $1 million in deposits for vessels under contract to be sold. Year to date, we have $20 million sold or under contract to be sold. We may end up selling more vessels in 2020 than we originally envisioned as we shrink and high-grade the fleet even further, but we still feel comfortable with the $39 million estimate for 2020.

The generation of free cash flow remains our key focus and is the key determinant in our cash incentive program. As we look out further to 2021, we need to lighten the ship. We won't have the working capital liquidation benefit in 2021, and we will have to resume some level of dry dock activity. In addition to the three actions I just noted as key to 2020 free cash flow generation, we must focus and concentrate the shore base footprint, the fleet mix, and the customer base. I'll now move on to the results for the quarter.

As we mentioned in the press release, each of our four regions had higher average day rates, lower overall operating costs, and higher operating margins as compared to the previous quarter. This was achieved with our lowest G&A cost level ever, a normalized $20 million per quarter or $81 million annually. In the first quarter of 2020, Tidewater generated a revenue of $116 million, a 5% or $6 million decrease from the same period in the prior year.

This was largely driven by operating an average of 15 fewer active vessels, a result of the previous plan on reducing, refocusing, and as a result, high-grading the Tidewater fleet. With the current pullback, this will accelerate. As a result of delays in getting vessels on hire in mid-March, as the pandemic intensified, active vessel utilization decreased to 79% in the first quarter, down from 81% in the prior quarter.

Our general and administrative expense of $21.4 million included $1 million related to the impairment of a receivable in Nigeria from a small intermediary, but even including this non-cash item, we had a 21% decrease year over year resulting from decreased headcount and lower stock compensation costs. The result is a normalized run rate of $81 million a year, which is down $64 million from the merger pro forma run rate of $145 million.

Net cash flows used by operating activities for the quarters was $27.5 million, and free cash flow was -$15.2 million. The negative cash flow numbers for the quarter were due to the planned dry dock spend of $25 million and the buildup in working capital, which, incidentally, wasn't planned, but which we anticipate to reverse over the remainder of the year.

Obviously, our first quarter dry dock program was done to prepare the business for what we believe would be a better market with improving demand and increasing day rates, which we did begin to see in the first quarter. As I mentioned previously, we have a few vessels stuck in dry docks around the world that we will be completing in the second quarter. Looking on to our results, at a more regional level, our

America segment saw vessel revenues decrease 10% or $3.4 million during the quarter ended March 31st, 2020, as compared to the quarter ended March 31st, 2019. This decrease is primarily the result of four fewer active vessels and the reduction in active utilization from 87%-86%. However, average day rates increased by 4%, partially offsetting these declines.

Vessel operating loss for the America segment for the quarter ended March 31st, 2020, was $1.2 million, which was $100,000 more than the operating loss for the year ago quarter. The decrease in revenue was nearly offset by the decrease in operating costs. In the Middle East, Asia Pacific, revenue increased 21% or $4.4 million during the quarter ended March 31st, 2020, as compared to the quarter ended March 31st, 2019. Active utilization for the most recent quarter increased from 76%-78%.

Average day rates increased 9%, and average vessels in the segment increased by four. The Middle East, Asia Pacific segment reported an operating loss of $900,000 for the quarter ended March 31st, compared to an operating loss of $1.2 million for the year ago quarter.

Activity remains high, with Saudi Aramco continuing to increase its demand for vessels in a region where availability is tight, as is crew access, due to virus-related travel restrictions. For Europe and Mediterranean, our vessel revenues increased 3% or $900,000 during the quarter ended March 31st, 2020, as compared to the year ago quarter. Average day rates for the same period increased 14% because of increasing demand for vessels in the region. Active utilization also increased 3 percentage points during the quarter compared to the year ago quarter.

The vessel fleet decreased by four active vessels, which partially offsets these improvements. The segment reported an operating profit of $1.5 million for the quarter ended March 31st, compared to an operating loss of $3.3 million for the year ago quarter.

For the North Sea in particular, we saw the spot market largely evaporate in the past 45 days, with drilling cancellations and a flood of more than 30 PSVs going idle, which is lowering the day rate of the occasional spot market hire. Vessels without a high probability of moving on to additional work are being put in lay-up. We have laid up two vessels recently and are likely to send more to lay-up if the spot market continues to remain weak in the typically strong summer season.

In West Africa, where vessel revenues decreased 27% or $9.6 million during the quarter ended March 31st, 2020, as compared to the quarter ended March 31st, 2019. The West Africa average fleet decreased by 10 vessels during the comparative periods. Active utilization for the segment decreased from 77% during the first quarter of 2019 to 68% during the first quarter of 2020.

Vessel operating profit decreased to an operating loss of $4.9 million for the quarter, primarily due to a decrease in active vessels coupled with higher operating costs from higher-than-anticipated downturns. Despite the expectations for an improving quarter, with dry docks wrapping up in the regions, we were impacted by the untimely combination of virus-related challenges and the oil price collapse.

And so, while it's difficult to see past today's turmoil, there is a likelihood of a steep recovery in the future. It's not reverting to an upward-sloping demand trend line. It's a downward-sloping one, but it's still reverting upwards from here. And on that note, Brandon, let's open it up for questions, please.

Operator (participant)

Thank you, sir. We'll now begin the question-and-answer session. If you have a question, please press star one on your telephone keypad.

If you'd like to be removed from the queue, please press the pound sign or the hash key. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please press star one on your telephone keypad. From Clarksons Platou, we have Turner Holm. Please go ahead.

Turner Holm (Managing Director)

Hey, good day, gentlemen. Hope you all are keeping safe. Quintin, thanks for the detailed cash flow outlook and your prepared remarks. It's certainly helpful. First, I just wanted to clarify something. There's been a major drilling company, as you know, that filed proactively for Chapter 11. On the back of that, I guess there's been some investor speculation that other oil services companies may follow suit. I assume I'm correct in saying that you all are not considering that strategy. Is that correct? Oh, absolutely not.

Quintin Kneen (President and CEO)

I mean, again, we're still, we've got a very manageable debt load, and we're looking to be cash flow positive. Certainly not in any planning that I have today.

Turner Holm (Managing Director)

Yeah, I wouldn't expect so, but I thought I'd just make the point. And secondly, you discussed some of the structural issues with the industry, Quintin. And to that regard, consolidation has been an oft-discussed topic. And in this environment, I guess there have been some key lenders to the industry that have been beginning to convert debt to equity in some cases.

And so I was wondering if you all are seeing opportunities to take over bank-controlled vessels or in some way participate in consolidation without necessarily stretching the balance sheet?

Quintin Kneen (President and CEO)

Oh, absolutely. I mean, any type of legitimate cooperation, whether it's managing vessels for other people, pooling vessels, outright consolidation, non-recourse debt structures where you've got the boats off balance sheet and you get a little bit of the upside with a call option on the boats, all of that is out there and being discussed.

And I would say that over the past four weeks, the activities and those discussions have heated up. So my hope is that we'll see more of that. If we can't do outright consolidation because of the debt loads that are out there, perhaps there's some other cooperative arrangement that's, of course, legitimate, but allows us to act as a team in defending the industry.

Turner Holm (Managing Director)

Sure. And then sort of lastly, I guess I'd wonder how you think the cycle is going to play out in the medium and longer term. You mentioned that the cycle is seen as a faster fall compared to what we saw post-2014, really due to the contract terms. But then I guess I wonder if you might also expect a faster recovery at some point out in the future, just given the lack of new builds and high scrapping or scrapping in place. Just curious on how you think the cycle plays out.

Quintin Kneen (President and CEO)

Yeah, my final remark in the prepared remarks was trying to hit at that, which is there is going to be a reversion to the mean, even if it's a downward-sloping trend line, and we're well below that mean line today. Okay? So I do expect this business to pop up. I don't know when it's going to be. There's a couple of areas that I'm concerned about from a long-term recovery standpoint, and quite frankly, the continent of Africa.

We've really seen a quick pullback by the majors and super majors in that area, and I'm not sure that they have the ability to go back, quite frankly, and I'm worried about if the pandemic takes hold in the continent of Africa, how long it takes to clear, so there are large regions of the world that I worry about coming back slower, and West Africa is one of them, but I don't worry about, for example, what you're talking about, the quick snapback, I expect that in the North Sea, fully expected, it's the most reactive market out there, it's an open market, it's a free market, they clear faster than anything, they naturally clear faster than any market, so I do expect to see that in the North Sea, I see the corrections there, but there are certain areas, principally West Africa, that I'm worried about.

Asia has long been oversupplied. We talked about this beginning in 2014 downturn. I don't think it gets any worse, but I don't think it accelerates any faster.

Turner Holm (Managing Director)

Okay. And I guess I have one more follow-up maybe while I have you on the line here. And that's just how you see the activity sort of developing through the year. And you mentioned something on the order of 20%-25%. How do you kind of think through those scenarios? I'm sure there's a lot of sort of sensitivity on the upside and downside. And presumably, that 20%-25% is the basis for your cash flow bridge that you built.

Is that 20%-25%, is that something like how do you think about that relative to rig count so we can kind of track it through the year and get a sense of where you all might land from a financial perspective? I guess that's the question.

Quintin Kneen (President and CEO)

Yeah, I appreciate the reason for the question. And as I mentioned, it is a bit of a fool's errand, right? Trying to grab that knife as it's falling, it's very difficult. But what I'm basing that on is what I'm seeing around the world, what I'm seeing in vessel cancellations, and generally what I'm seeing in activity levels where we were anticipating a spot market that didn't happen. So I think that when we're going through periods like this, I think it's important to prepare for those types of downturns.

What I wanted to lay out for everyone on the call is, even with a downturn of that magnitude, this company is prepared to weather the storm. Quite frankly, the optimism that you were alluding to, there's a little bit of that in me as well. And I'm looking forward to seeing some of that materialize as we go through the year. It may not be that bad, but if it is that bad, we're prepared.

Turner Holm (Managing Director)

All right. Thank you very much, Quintin. I appreciate it.

Quintin Kneen (President and CEO)

Thanks, Turner. Stay safe.

Operator (participant)

From Baird, we have Patrick Fitzgerald. Please go ahead.

Patrick Fitzgerald (Managing Director)

Hi. Thank you for taking the questions and for all the detail. I wanted to ask about your $33 million dry dock in 2020 and what that means for active vessels. Your question is, does that mean I'm decreasing the amount of active vessels as we go through the year?

Quintin Kneen (President and CEO)

Yes. Yeah. Yeah. Absolutely. It does. But a lot of those vessels have been on contract that have been canceled. So they're just going into lay-up. And a lot of those, not a lot of those, but there will be some that go into the scrapyard. Definitely, the vessels that we had in lay-up prior to this pullback are more likely to go into the scrapyard to make room for these vessels that are coming off higher. Order of magnitude is hard to say right now, but it can easily be 20 to 25 vessels, could be more.

Patrick Fitzgerald (Managing Director)

Okay. And so in order to get those, if they go on to lay-up, to get those back out, you would have to spend the $20 million that you're expected to spend this year. Is that correct? That's right.

Quintin Kneen (President and CEO)

That's right. You eventually have to spend that money.

You can work with class societies to get extensions by the month. But again, it's a cost of the business. And if you're going to keep that, if you're going to bring that vessel active or keep it active, you're going to end up spending that money. So dry dock is a delay, provided you're going back to the same fleet count you were at, active fleet count.

Patrick Fitzgerald (Managing Director)

Okay. And then are you seeing other operators do the same thing?

Quintin Kneen (President and CEO)

Quite frankly, I've been so focused on my own business, I haven't been watching what other operators are doing over the past 30 days. But I can only imagine that everyone's doing the same thing.

Patrick Fitzgerald (Managing Director)

Okay. For the $395 million of revenue, is there any way to break out how much of that is production versus drilling services?

Quintin Kneen (President and CEO)

The drilling piece is getting much less, but unfortunately, it's not because the vessels that get chartered don't actually get chartered for a specific task. Sometimes they do, but frequently, they're doing both. So really, it's the demand piece that kind of incrementally impacts a group of vessels.

And so if you have four vessels that are doing both drilling support and production, maybe it goes down to three vessels or something like that. But as I look at the $395 million and you look at the amount that I indicated was the spot market work, that work is still more drilling related. And feel comfortable with it because those rigs are still drilling, but it's at risk.

Patrick Fitzgerald (Managing Director)

Okay. And then so these asset disposition, $39 million for the year, $10 million roughly in the first quarter. I mean, is this all scrap? Are some of them going into other industries?

Quintin Kneen (President and CEO)

Yeah. Now, we actually look to. I would prefer, of course, to sell them out of the industry into some other function. And there's not a lot. As I indicated, there's not a real big secondary market for these vessels, but there is some. Very often, they get used for some of the non-oil and gas offshore-related cargo transportation. Very often, they can be used as shuttle vessels. So you see some of them using smaller ones using inland barge work. So yeah, there's an opportunity to sell these into those markets. And that's what we do when we're selling these vessels.

So in fact, the disproportionate number in the first quarter were actually sales as opposed to scrapping. But scrapping programs, I think, will be accelerated as we go into the second and third quarters.

Patrick Fitzgerald (Managing Director)

Okay. So if you're $39 million, how many vessels is that, if you don't mind me asking?

Quintin Kneen (President and CEO)

The $39 million was originally Sam, how many were in the vessel held for sale category? 46. 46. Yeah. So $39 million equates to 46.

Patrick Fitzgerald (Managing Director)

Okay. And so is there a huge spread in price and sales versus scrap?

Quintin Kneen (President and CEO)

So not a lot in the grand scheme of things, but scrapping, you can probably net $200,000-$400,000. And the sale is probably $900,000-$1.3 million, depending on the vessel specification, size of the vessel, all of that. But that's order of magnitude between those two activities.

Patrick Fitzgerald (Managing Director)

Okay. Great. Last one for me. I just wanted to ask about the Troms Offshore subsidiary. There's six vessels there. Is that correct?

Quintin Kneen (President and CEO)

There is. That's correct.

Patrick Fitzgerald (Managing Director)

And then what's the status of those vessels? Are they working?

Quintin Kneen (President and CEO)

So those are very capable North Sea vessels.

I couldn't tell you if they're all working today. I think there's two that are probably going to be idled here quickly. But those are the kind of boats that go back to work. I don't worry as much about the more sophisticated Norwegian or North Sea tonnage because when I was talking earlier about, yes, this is a commoditized industry, don't get me wrong, but nothing's perfectly commoditized.

And so when it comes to higher spec vessels and larger vessels, those are the ones that get the work. And as I said before, sometimes they don't get the price you want, but they get the work. So they don't get price, but they get volume. So I think two of those are off-hire right now, but not overly fussed by those vessels.

Patrick Fitzgerald (Managing Director)

But you think those vessels cover the $65 million of debt that's at that subsidiary?

Quintin Kneen (President and CEO)

Oh, yeah. Yeah. Oh, I'm sorry. Your question wasn't just about the subsidiary. It was about the GIEK Norwegian debt on those vessels.

Patrick Fitzgerald (Managing Director)

Yeah.

Quintin Kneen (President and CEO)

That's stuff that's long-dated. Yeah. I'm not worried about that at all.

Patrick Fitzgerald (Managing Director)

Okay. Thank you.

Quintin Kneen (President and CEO)

Thanks.

Operator (participant)

From Robotti & Company, we have Bob Robotti. Please go ahead.

Robert Robotti (President and CIO)

Hi, Quinn. How are you?

Quintin Kneen (President and CEO)

Bob, I'm fine. How about yourself?

Robert Robotti (President and CIO)

Okay.

Quintin Kneen (President and CEO)

Great.

Robert Robotti (President and CIO)

Great. Tough time keeping up the good work. There's a lot of detailed information you had in there. At the end of the year, of course, you did the review in terms of fleet and fleet adjustments, right? Of the 216, taking 46 out, 4 active, 42 not. You obviously have done a lot of work because you've updated kind of information.

That and also the cost part of the equation, do you think you'll have kind of because embedded in your estimates, you must have huge granularity. So will you do more in terms of and I guess because what dry dockings are, how things have changed because of COVID, obviously, you've evaluated what that fleet looks like and how much you're going to keep and how much not. Although it's also dynamic too. I imagine it's probably hard to do exactly today. Do you anticipate updating, as you did at the end of the year, that fleet review? Because that's an important component for driving costs down, I imagine.

Quintin Kneen (President and CEO)

Absolutely. Yes. We certainly have made some assumptions as we've gone through the process of trying to guide where the business is going to go.

When it comes down to the level of granularity as to which particular vessels are going to be going into just going right to the scrapyard and some going into lay-up, we're still in the process of evaluating that. We'll make that determination in, well, make it this quarter as we go through a little bit more of the reverberations from the downturn. But suffice it to say that we're going to be very judicious in managing the capital as we go through the remainder of the year.

Robert Robotti (President and CIO)

Then when you ran through the numbers, though, you did say that SG&A thought was still going to be around $81 million in deduction, which is kind of what it was kind of pre. Is that kind of a current estimate or are there other details too? Because I was a little bit surprised that number didn't change some.

Quintin Kneen (President and CEO)

Yeah. So I definitely brought it down from what I think we said on the last call, which was about $83 million. And right now, we're still evaluating what is the right shore-based footprint. So I think there's room there too, naturally. Obviously, we're running at a lower rate than we had budgeted. There's a couple of things that are on my to-do list.

One is I've got to get a CFO in eventually, right? And that comes with its own cost. So that number is going to be added to the equation. But when I talked earlier about evaluating the shore-based footprint, yeah, there's definitely reasons to believe that that number should be able to go down. There is a lower limit, quite frankly, just because not all of that is personnel. And really, what we're talking about is closing down offices.

What we were experiencing, even in the offices that were in the process of shutting down, like in Southeast Asia, is you're still on the hook for about six months for the cost as you run out leases and you run out personnel and severances and things like that. Part of it is just waiting to see exactly what the plan is and then exactly how much it's going to cost us to get out of those activities. Yeah. When I think about G&A, I think about it on an active day cost, cost per active day.

The numbers that we have historically run at are at about 1,450 per active day. Okay? As the active fleet count comes down, that number should come down as well. However, that range, that 1,450, that's a useful number within a relevant range.

If we step out of that range, then you have some fixed cost elements that I have to deal with. So that's the way I think about G&A costs. And as we go through the business and reset the business, that's the number I think about.

Robert Robotti (President and CIO)

Well, so you obviously have a task in front of you because, as you say, on a per-vessel active fleet basis, that's coming down. So therefore, you've got plenty of push there, I'm sure you recognize.

Quintin Kneen (President and CEO)

That's correct.

Robert Robotti (President and CIO)

And of course, the other thing is how disappointed will you be if in the next six to nine months, you haven't found something to consolidate with? Because all of these things you're doing in terms of fleet size, downsizing, you, others, costs, all those things become so much easier.

And I guess I saw that Harvey Gulf came out today and said they've renewed two vessels, but they're actively looking for consolidation. And of course, you've got Hornbeck doing something. You've got Bourbon. So how disappointed? Because really, it seemed to me as if there were plenty more options that were available kind of coming into the year, given the market really was improving. And given where things are today, it would seem as if the idea of consolidation being a key element for advancing and success becomes all the more instrumental, I think.

Quintin Kneen (President and CEO)

Oh, 100% agree with you. I mean, consolidation is the answer to this problem. Okay. My issue is getting the capital providers to understand that they're not getting poor returns. Okay? Because unfortunately, there's just still not enough vessel companies that have cleaned their balance sheets.

But as I mentioned when I was talking with Turner earlier, there's a lot more dialogue going on now than there has been in the past six months. So I'm actually disappointed now that we haven't gotten any more consolidation done, either through us or somebody else in the industry. You know what? I welcome Harvey Gulf and others to consolidate the industry with us.

I mean, that's fantastic. But yeah. So I strongly believe that consolidation is the answer. It's the best thing for the capital providers. It's the best thing for the industry. It allows us to rationalize the fleet. My only caution is I just don't want to do it to disadvantage my current equity holders.

Robert Robotti (President and CIO)

Clearly, the benefits of consolidation today probably are worth more money than kind of clearly what they were three months ago. Absolutely.

Quintin Kneen (President and CEO)

Absolutely.

It's anytime the margins get thinner, the benefit from reducing SG&A is all that much more disproportionate.

Robert Robotti (President and CIO)

Thanks, Quinn. Thank you, sir.

Quintin Kneen (President and CEO)

Thanks, Bob.

Operator (participant)

From [Uncertain], we have [Uncertain]. Please go ahead.

Good morning, gentlemen.

Quintin Kneen (President and CEO)

Good morning, [Uncertain]. How are you, sir?

Okay. All good. Thank you. I've got a question about competitors. And I know you touched upon this a little bit before. You said, "I've been so busy working on my own team, I couldn't focus on the competitors." But I still got to ask, can you show any or give any color about the behavior of others out there? Is there a way to kind of compartmentalize how they respond to this challenge?

And last time on the prior call, you had shown amazement to the ability of others or the willingness to find cash and finance these dry dockings, either PSVs or lay-ups. Do you see that continuing, or have people come to the end of the rope?

No. Honestly, I still see it continuing, unfortunately. Some of the narrative in my prepared remarks was really talking to those competitors like, "Stop doing this. Scrap the lower-end tonnage. You're killing yourselves, and you're killing the industry along with it," right? That's my concern. A recent case in point, and of course, I've been really focused on our business, the Tidewater business, but I've certainly always kind of got feelers out on other competitors.

What frustrates me more than anything is they're not the largest player, but a medium-sized player in Norway that just got bailed out is now putting boats to work at cash flow break-even or just below that. And that's idiocy. I mean, why would a bank refinance a company just so that it can put boats to work at break-even? That kind of activity happens out there, unfortunately. And it's because vessel owners still think that this industry hasn't changed, and this industry is changing. And so what I was trying to get to in my prepared remarks was just that.

Thank you.

Yep. Thanks, [Uncertain]. Talk soon.

Operator (participant)

And once again, if you do have a question, please press star one. And from Nationwide, we had Cristian Donoso. Please go ahead.

Cristian Donoso (Senior Investment Professional)

Hi guys. Thanks for the call and the details as well. A couple of quick questions in terms of covenant compliance with the debt. Are you envisioning any issues there in the near future?

Quintin Kneen (President and CEO)

No. In fact, we did a bond consent and tender in Q4, and we really widened out the covenants, which was quite fortuitous. We did it because we ended up having to pay 108 to buy back the bonds. So I tried to get as much as possible in exchange for that premium. So no, I'm actually not worried about the bonds at this point.

Cristian Donoso (Senior Investment Professional)

Okay. And I know that that is due in two years out. It's still plenty of time. But any initial thoughts on when you guys are going to start thinking about the refi here? Any ideas?

Quintin Kneen (President and CEO)

I'm always thinking about the bonds because we know we want to take them out. The issue with the bonds is that they have a significant make-whole. Even now, even to the day before maturity, there is a minimum $1 million prepayment or a penalty, if you will. So it's frustrating. Those bonds are their take-back paper in the bankruptcy. There's a lot of privileges around that debt. So hey, listen, it's good paper. And as a result, I'll ride it as long as I can because I don't want to pay the high make-whole to call them. But we'll see what happens.

Cristian Donoso (Senior Investment Professional)

Okay. In terms of the markets, you mentioned on the last call that you were planning to exit. How are those exits proceeding and when you expect to get out of that?

Quintin Kneen (President and CEO)

Yeah. Right. So pulling out of Brazil is always a multi-year process, unfortunately. In Southeast Asia, we'll be closing the office on June 30th.

And we'll generally take all the shore-based facility and management that's going on there and move it into the Middle East region. So we'll manage it out of that office. Brazil is a slow process. We have to wind ourselves out of the contracts and looking for any other opportunities. I was hopeful at the beginning of the year because the market was improving in Brazil as well as other places, that there might be a way to exit Brazil via a sale process. But unfortunately, that's off the table today.

Cristian Donoso (Senior Investment Professional)

Okay. I think that's just a quick one. In terms of the backlog, can you provide some visibility in terms of what is production services versus drilling or you don't have that granularity?

Quintin Kneen (President and CEO)

Yeah. Unfortunately, when we contract the vessels, very seldom are they contracted for a specific activity. Sometimes we can discern that by knowing where the vessel's working and so forth. But the reality is, at this point, production departments and drilling departments are sharing vessels and trying to be as efficient as they can be. And so we don't have a good guide for that, unfortunately.

Cristian Donoso (Senior Investment Professional)

Okay. Thank you.

Quintin Kneen (President and CEO)

Thank you.

Operator (participant)

And we have no further questions at this time. We'll now turn it back to Quintin Kneen for closing remarks.

Quintin Kneen (President and CEO)

Thank you, Brandon. I'd like to close today's call by summarizing that Tidewater has become an agile organization that is applying continuous improvement principles to optimize its operational processes and general administrative spend. We have created a technology platform that enables Tidewater to advance efficiency for our shore-based and fleet operations. As a recent example, in April, we achieved a five-day financial close with our global teams teleworking.

This is a remarkable achievement that was conceivable for Tidewater 18 months ago. This was possible because of our dedicated staff, efficient processes, technology, and most importantly, a new resilient Tidewater culture that embraces change. This is why I am confident that Tidewater will overcome the obstacles presented to us.

Tidewater has an experienced team that has proven themselves in past downturns, who will overcome the unprecedented challenges before us, and who will once again prove themselves as we emerge from this downturn, strong and well-positioned to capture the recovering market. Thank you, and we look forward to updating you again in August. Goodbye.

Operator (participant)

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.