Tidewater - Earnings Call - Q2 2025

Executive Summary

• TDW delivered a clean beat: revenue $341.4M vs consensus $317.3M and diluted EPS $1.46 vs $0.48, driven by record average day rate ($23,166) and stronger uptime; gross margin was 50.1% for the third straight quarter.
• Management reiterated FY25 guidance (revenue $1.32–$1.38B, gross margin 48–50%), but trimmed near-term expectations: Q3 revenue down ~4% q/q and gross margin ~45%, citing softer day rates in the North Sea/West Africa and FX normalization.
• Strategic catalysts: completed a long-sought capital structure reset ($650M 9.125% senior unsecured notes due 2030 and a $250M undrawn revolver) and authorized a new $500M share repurchase program (>20% of market cap), enhancing flexibility for both M&A and buybacks.
• Setup into Q4 is constructive: utilization expected to improve as drydock days fall by half, supporting margin lift; firm backlog plus options of $585M covers ~93% of FY revenue guidance midpoint.

What Went Well and What Went Wrong

What Went Well

• Day rate and uptime outperformance: average day rate of $23,166 set a quarterly record; uptime lowered repair costs and fuel during idle days, lifting gross margin to 50.1% vs prior guidance of 44%.
• Free cash flow strength: FCF of $97.5M, second-highest since the recovery began; YTD FY25 FCF >$192M.
• Balance sheet and capital returns: issued $650M unsecured notes (9.125%, due 2030), added a $250M revolver, and launched a $500M buyback, while repurchasing 1.4M shares in Q2 for $50.8M at $36.80 avg.

Selected quotes:

• “Day rates outperformed our expectations by more than $1,300 per day, setting a new quarterly day rate record at $23,166... our gross margin of 50.1% came in well above our expectation of 44%…” — CEO Quintin Kneen.
• “Pro forma for the refinancing, Tidewater had liquidity north of $600M at the end of Q2…our new debt instruments provide substantial flexibility…we are excited to announce the $500M share repurchase program.” — SVP West Gotcher.

What Went Wrong

• Near-term softness and day rate pressure: management flagged softer leading-edge day rates in the North Sea and West Africa into Q3, with FX tailwinds fading.
• Regional headwinds: Africa revenues fell 22% q/q on winding down Orange Basin campaigns; gross margin decreased by 12pp on lower rates, utilization, and higher R&M/fuel.
• Working capital risk: Mexico AR remained unpaid for several quarters; at June-end ~14% of trade AR was from primary Mexican customer (historically collectible, but monitored).

Transcript

Speaker 3

Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Inc. Second Quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to West Gotcher, the Senior Vice President of Strategy, Corporate Development, and Investor Relations. Please go ahead.

Speaker 2

Thank you, Janice. Good morning, everyone, and welcome to Tidewater Inc.'s Second Quarter 2025 earnings conference call. I'm joined on the call this morning by our President and CEO, Quintin Kneen, our Chief Financial Officer, Sam Rubio, and our Chief Operating Officer, Piers Middleton. During today's call, we'll make certain statements that are forward-looking and refer to our plans and expectations. The risks and uncertainties and other factors may cause the company's actual performance to be materially different from that stated or implied by any comment that we're making during today's conference call. Please refer to our most recent Form 10-K and Form 10-Q for additional details on these factors. These documents are available on our website at TDW.com or through the SEC at SEC.gov. Information presented on this call speaks only as of today, August 5, 2025.

Therefore, you're advised that 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 and non-GAAP financial measures can be found in our earnings release located on our website at TDW.com. With that, I'll turn the call over to Quintin.

Speaker 0

Thank you, West. Good morning, everyone, and welcome to Tidewater's Second Quarter 2025 earnings conference call. Before beginning my prepared remarks, I'd like to first congratulate Piers Middleton on his recent appointment as Chief Operating Officer. Piers has over 30 years of experience in the industry and has been instrumental in the success that Tidewater has enjoyed over the past four years, and he will now be responsible for all of Tidewater's vessel operations in addition to the Chief Commercial Officer responsibilities he has held for the past four years. I'll start off today's prepared remarks by providing some highlights of the second quarter, discuss our recent balance sheet refinancing, update you on our share repurchase program and our current view on capital allocation, discuss the offshore vessel market, and lastly, provide an update on the state of vessel supply.

West will then provide some additional detail on our financial outlook and our new capital structure and share repurchase program. Piers will give an overview of the global market, and Sam will discuss our consolidating financial results. Second quarter revenue and gross margin nicely exceeded our expectations. Revenue came in at $341.4 million, due primarily to a higher than expected average day rate and slightly better than anticipated utilization. Gross margin came in at over 50% for the third consecutive quarter. Day rates outperformed our expectations by more than $1,300 per day, setting a new quarterly day rate record at $23,166. The primary factor driving the increase in average day rate was the benefit of our fleet rolling onto higher leading-edge day rate contracts, bolstered by foreign exchange rates that largely strengthened against the dollar during the quarter.

Additionally, our uptime performance continued to outperform our expectations as our vessels continued to benefit from the substantial drawback and maintenance investment we've made over the past few years. As a result of a higher than expected printed day rate for the quarter, along with improved uptime performance of our vessels, our gross margin of 50.1% came in well above our expectation of 44% provided on last quarter's call. Continued uptime outperformance in the quarter helped drive the gross margin beat because not only do we benefit from the incremental revenue associated with the vessel roofing, but we also avoid the expense of the repair itself, and we avoid the fuel expense associated with the operation of the vessel while it is on hire.

During the second quarter, we generated $98 million of free cash flow, the second highest quarterly free cash flow figure since the offshore recovery began, up slightly from last quarter, bringing the first half of 2025 total free cash flow to over $192 million. In early July, we closed on a $650 million U.S. unsecured bond that refinanced the vast majority of our previously outstanding debt instruments, namely our two Nordic bonds and our term loan facility. We are very pleased to have consummated this refinancing, achieving our long-discussed goal of establishing a long-term unsecured debt capital structure more appropriate for the cyclical business in which we operate. Alongside the new bond, we put in place a $250 million revolving credit facility that provides us with a significant amount of financial flexibility.

Importantly, given liquidity enhancement of the revolving credit facility, we are now in a position to operate the business with less cash on the balance sheet as we now have an alternative source of liquidity besides cash on hand. West will provide more details next, but another important feature of our new debt capital structure is that it allows for a substantially increased capacity for shareholder returns. Our confidence in the long-term cash flow generation capability of the business is such that we are pleased to announce that our board of directors has approved a $500 million share repurchase program, which equates to over 20% of the company's closing market capitalization as of yesterday. I'd like to discuss our share repurchase philosophy a bit further, given the new capacity we have available to us and the size of the new program.

Over the past year and a half or so, under our prior debt documents, we were somewhat constrained in our capacity to repurchase shares. As such, we approached the share repurchase program on a quarter-by-quarter basis, updating our share repurchase capacity on a quarterly basis and, for the most part, rapidly executing on our available capacity each quarter to ensure we maximize the share repurchase capacity available to us, particularly during those times when we saw a more pronounced dislocation in the stock price. Because we have previously executed our program in full each quarter, I don't want to leave you with the impression that we will execute all of the $500 million this quarter. We see this new program as a long-term repurchase program.

Given our current cash on hand and our future quarterly cash flow generation, we can easily execute on this program over the next year or so and maintain a net debt to EBITDA ratio well below one times. We won't be utilizing our revolving credit facility to repurchase shares, and our capital allocation philosophy still prioritizes acquisitions over repurchases when such acquisitions add more value to our equity holders. Just to wrap up on the prior repurchase program, as previously announced, during the second quarter, we fully utilized the remaining capacity under our prior share repurchase program, repurchasing 1.4 million shares at an average price of $36.80 per share, totaling $50.8 million of shares repurchased in the second quarter. As it relates to capital allocation priorities, we remain committed to pursuing M&A opportunities, and this is still the preferred direction for us to allocate capital.

As excited as we are to announce a new share repurchase program, we are optimistic that we can consummate more M&A transactions. Fortunately, the longer-term cash flow output for the business is such that we can likely execute on both acquisitions and share repurchases, but the right value of free of acquisitions can provide benefits in the excess of what a share repurchase alone can achieve, and we believe there are such opportunities in the market today. We remain open to a transaction using stock, cash, or a combination of both, although our view of the intrinsic value of our shares will influence how we employ stock as a consideration.

We will contemplate additional balance sheet leverage for the right acquisition, provided that we have confidence that the near-term cash flows provide the ability to quickly delever back to below one times net debt to EBITDA, very similar and consistent with what we have done in our prior acquisitions. Shifting gears a bit, I'd like to discuss our view on the current offshore vessel market and how we see the market evolving over the coming months and quarters. West and Piers will provide more commentary shortly, but I think it's worth providing some context on our view of the market outlook today. Coming into 2025, uncertainty around offshore activity, particularly in the first half of the year, was the prevailing theme, with drilling activity poised to rebound in the back half of the year.

Recent macroeconomic and geopolitical events seem to be extending that period of uncertainty, including for offshore vessels. We are in the fortunate position of benefiting from operations in almost every geographical location around the world and from a wide variety of offshore end markets, including production, subsea, offshore construction, and drilling, and we remain confident in the fundamentals across each of these service lines. That said, the near term, specifically the next quarter or two, appear to be a bit softer than we originally expected, offsetting the fact that the last two quarters were much stronger than we originally expected. We remain unaware of any project cancellations and customer conversations remain constructive, nonetheless, we seem to be in a period that can be characterized as lacking any sense of urgency related to commencing committed capital expenditures.

Fortunately, subsea and production-related activity remains robust and is helping to mitigate the near-term activity softness in the drilling market. When vessel supply is as tight as it is, marginal improvements in drilling have an outsized impact on our ability to push up day rates across all of our service lines. The current level of subsea and production activity is strong, but it isn't quite sufficient to put the same strain on existing vessel supply that is needed to meaningfully push up day rates, but it has been enough to hold leading-edge day rates at their current levels.

The continued expansion of subsea and production-related work provides a higher baseline demand, which reduces the number of vessels available to satisfy the increase in drilling activity we see shaping up nicely in 2026, which should then provide that much more of a strain on vessel supply as drilling activity picks up and therefore increase our ability to once again aggressively push day rates higher. The vessel supply outlook remains essentially unchanged from the prior quarters, and really over the past year, nothing has changed, and our understanding of new build conversations globally points to very limited activity. We're not aware of any new build announcements during 2025. The number of new builds on order, representing less than 3% of the global fleet, are expected to deliver in late 2026 at the earliest, likely into 2027 and into 2028.

We remain of the view that new build capacity won't sufficiently replace vessels expected to attrition from the global fleet during the same timeframe. As such, we still view vessel supply limitations as a tailwind over the coming years as subsea and production markets structurally grow and as drilling activity increases. We watch new build activity very closely, and we will continue to do so, but believe that current shipyard capacity, prevailing global day rates, and contractual terms, the state of the vessel financing markets, as well as vessel technological obsolescence considerations, make any large-scale new building programs unlikely. In summary, we are pleased with the strong first half of the year and remain confident in our full-year expectations.

We are now better positioned than we ever have been since the offshore recovery began with our new debt capital structure and its added flexibility to capitalize on value-accretive acquisitions and share repurchases. We remain confident in a robust free cash flow outlook, and we look forward to deploying this cash in the most value-accretive manner for our shareholders. With that, let me turn the call back over to West for additional commentary and our financial outlook.

Speaker 2

Thank you, Quintin. Expanding on our recent debt refinancing, subsequent to the quarter end in early July, we closed on our inaugural U.S. high-yield bond issuance, issuing a five-year $650 million unsecured bond with a coupon of 9.125%. The net proceeds of the issuance went to the redemption of our two previously outstanding Nordic secured and unsecured bonds, as well as the previously outstanding term loan facility. Alongside the new unsecured bond issuance, we entered into a $250 million revolving credit facility with a syndicate of nine banks. The completed refinancing marks an important milestone on the continued evolution of Tidewater Inc. The new bond represents the first issuance into the U.S. high-yield markets in the 65-year-plus history of the company and establishes a debt capital structure that is well-suited for our business, extending maturities out five years and providing substantial financial flexibility via the new revolving credit facility.

Pro forma for the refinancing, Tidewater Inc. had liquidity north of $600 million at the end of Q2. Further, given the new liquidity enhancement via the revolving credit facility, we are now comfortable to reduce the amount of cash held on the balance sheet that was previously our only source of liquidity. Importantly, the new bonds and revolving credit facility provide substantial flexibility as it relates to M&A and shareholder distributions. From an M&A perspective, we are unlimited in our ability to incur additional unsecured debt or assume debt related with an M&A transaction up to certain credit metrics, all of which were well below today. From a shareholder return perspective, our new debt instruments similarly provide for unlimited ability to return capital so long as we meet certain leverage metrics.

Under the bonds, we are unlimited in our ability to return capital to shareholders, provided that our net leverage ratio, defined as net debt divided by EBITDA, pro forma for a given return of capital is less than 1.25 times. Similarly, our revolving credit facility allows for unlimited returns to shareholders, provided that our net leverage ratio does not exceed one times. Under the revolving credit facility metric, to the extent that we exceed one times net leverage, we still retain the flexibility to continue returns to shareholders, provided that free cash flow generation is in excess of cumulative returns to shareholders. More broadly, our approach to leverage has not changed. We remain firmly rooted in our view of maintaining a leverage profile that, when combined with our cash flow outlook, provides us with the path to return to net debt zero within about six quarters.

Our leverage velocity matches up nicely with the shareholder return covenants in our new debt capital structure, as we feel comfortable that the latitude provided is consistent with our approach to managing our leverage profile and provides substantial capacity to pursue shareholder returns. As such, we are excited to announce the $500 million share repurchase program. Given our current leverage profile, current cash on balance sheet, and our outlook for cash flows, we believe this program is consistent with our philosophical approach to leverage and within the limitations set forth in our new debt instruments. As Quintin discussed, while our philosophy around share repurchases and capital allocation remains consistent, our approach to our share repurchase program will evolve given the new long-term capital structure and more permissive debt instruments.

We will remain opportunistic and look to take advantage of inefficiencies we see in the market, but the pacing of the program could take a different shape than what we've exhibited in the past, particularly to the extent an M&A transaction becomes actionable that requires a component of cash consideration. Having said that, we remain confident that the longer-term cash flow outlook for the business supports both M&A and returning capital to shareholders. Turning to our leading-edge day rates, I will reference the data that was posted in our investor materials yesterday. Across the fleet, our weighted average leading-edge day rate was consistent from the first quarter into the second quarter.

For our largest class of PSVs, we saw a nice pickup in day rates from the previous quarter due to strength in the Mediterranean, the Caribbean, and the U.S., offset by lower day rate regions such as the UK and Mexico. Similarly, in our medium-sized class of PSVs, we saw particular strength in Brazil, Australia, and the Caribbean, offset by lower day rate regions in the UK and the Middle East. For our largest classes of AHTS vessels, strength in the Caribbean helped push day rates. We entered into 15-term contracts during the second quarter, an average duration of nine months, as we look to a strengthening market as we progress into 2026. Looking to full-year 2025, we are reiterating our revenue guidance at $1.32 billion to $1.38 billion in a full-year gross margin range of 48% to 50%. We now anticipate Q3 revenues to decline by about 4% sequentially.

Although we do expect utilization to improve sequentially, more near-term softness than anticipated is meeting our previously expected utilization improvement. In addition, we see a modest softening in day rates in the North Sea and West Africa ahead of drilling activity demand improvements in 2026. We anticipate a Q3 gross margin of 45%. The sequential decline is due to the fallthrough on lower revenue, as well as higher costs associated with fuel expense related to idle days and repair and maintenance expense associated with vessels down for repair. As we progress into the end of the year, we anticipate utilization to improve sequentially from the third quarter into the fourth quarter due to dry dock days declining by about half, representing about 3 percentage points of utilization improvement.

We expect margins to improve in the fourth quarter due to the revenue associated with the reduction in dry dock days and associated reduction in fuel and repair and maintenance expense spend during dry docks. The midpoint of our revenue guidance range is approximately 93% supported by first half revenue plus firm backlog and options for the remainder of the year. Our firm backlog and options represent $585 million of revenue for the remainder of 2025. Approximately 73% of available days for the remainder of the year are captured in firm backlog and options, with our larger classes of vessels retaining slightly more availability to pursue incremental work as compared to our smaller vessel classes. The bigger risks to our backlog revenue are anticipated downtime due to unplanned maintenance and incremental time spent on dry docks. With that, I'll turn the call over to Piers.

Speaker 1

Thank you, West, and good morning, everyone. As both Quintin and West have alluded to, and as we've mentioned on the last couple of calls, the short-term, medium-term outlook for the offshore space remains challenging. While we've seen demand ease back slightly during 2025, we still feel that with the favorable supply story and with one of the youngest fleets in the industry, we're still well placed to weather any short-term headwinds and make further progress in the second half of 2026 and 2027 as expected demand comes back online for exploration and subsea construction projects. In Africa, we had a weaker Q2 than previous quarters as we experienced the winding down of several drilling campaigns in the Orange Basin, which over the last few quarters has supported a significant number of our larger PSVs in Africa.

We're still going to be supporting the remaining drilling campaigns in Namibia for the rest of the year, but not at the same level of PSV intensity as in the past six quarters. However, helping to offset some of the expected slowdown in Namibia, we won work in the Caribbean and have mobilized a couple of larger PSVs to support drilling campaigns in Guyana and Suriname, as well as also winning work in Mozambique for a couple more of our large PSVs at the tail end of the year to support subsea construction projects, which are expected to push through well into 2026. In the short term for the remainder of 2025 in Africa, we still have several ongoing discussions with customers, both for drilling support work as well as to support a few construction projects slated to start in Q4.

Longer term, as mentioned on previous calls, we still see strong demand for the region from the second half of 2026 onwards, driven by continued uptick in drilling, subsea construction, and long-term production support. Moving on to the Americas, we saw a very solid quarter for the region, and by leveraging our global footprint and best-in-class operations, we won a number of new contracts in the Caribbean, which allowed us to move vessels out of the North Sea and Africa, which helps us relieve some of the short-term pressure we're currently experiencing in those two particular regions. Looking ahead, we still see no slowdown in the long-term prospects for the wider region. The Caribbean seems set afire with both Guyana and Suriname continuing to develop their nascent offshore businesses.

In Brazil, although we've seen some Petrobras FRDs slip into 2026, the long-term prospects remain very bright, with both Shell and BW Energy sanctioning significant projects in Q2. In Europe, we had a strong Q2 driven by a strong North Sea spot market and good utilization in the Mediterranean during the first half of the year. Rates have held up well in the UK and are still above historical averages. Looking out for the remainder of the year, we do see a slowdown in demand, which we expect to pressure rates on the downside for the remainder of the year. On the plus side for the UK, Rosebank looks likely to go ahead and we expect some incremental PSV demand to support this project. In the Mediterranean and Norway, the long-term outlook remains positive.

However, a number of expected projects slated to start in 2026 in the Mediterranean could be affected by the ongoing conflicts in the eastern Mediterranean. As such, we'll be watching closely how this continues to evolve. In the Pacific, we're grossly flat in the quarter, but the good news is that with the resolution of the ongoing tribulations from Petronas and Eastern Malaysia now firmly behind us, we have started to see demand picking up again in Malaysia, and some of the locally owned vessels that were putting downward pressure on rates are returning to work. We're still a few quarters away, but expectations are by year-end things will be back to business as usual in Malaysia.

In Australia, there are still several incremental longer-term PSV tenders to support production still to be awarded, which are all expected to start in Q4, as well as a number of construction support scopes which are yet to be awarded. Looking out longer term, we see a very positive demand story unfolding in the latter part of 2026, as a number of long-term exploration development projects are expected to kick off in Indonesia, Myanmar, and Malaysia. Lastly, finishing off with the Middle East, the market remains very tight with limited availability of tonnage in the region. We expect the region to remain supply constrained with the EPCI contractors continuing to utilize any available vessels to support their operations in Qatar and Saudi Arabia, and that the opportunity will be there to continue to push rates as our vessels become available.

However, as we've mentioned on previous calls, this is a highly fragmented market, and as such, rate increases tend to take longer to push through than in other areas of the world. Longer term, we don't see any slowdown in the region, and the supply-demand balance still staying in the shipowner's favor for some time to come. With that, I'll hand over to Sam. Thank you.

Speaker 2

Thank you, Piers, and good morning, everyone. At this time, I would like to take you through our financial results. As on prior calls, my discussion will focus primarily on sequential quarterly comparisons, which includes the second quarter of 2025 compared to the first quarter of 2025, also including operational aspects that affected the second quarter. As noted in our press release filed yesterday, we reported net income of $72.9 million for the quarter, or $1.46 per share. We generated revenue of $341.4 million compared to $333.4 million in the first quarter, an increase of $8 million, or 2%. Second quarter average day rates of $23,166, or 4% higher versus the first quarter.

We saw a slight decrease in active utilization from 78.4% in the first quarter to 76.4% in the second quarter, due mainly to the increase in idle and dry dock days as several dockings scheduled in Q1 were pushed to Q2. Gross margin in the second quarter was $171 million compared to $167 million in the first quarter. Gross margin percentage in the second quarter remains steady at 50.1% and now marks three consecutive quarters with margins over 50%. The margin outperformance versus our expectation was primarily due to higher than expected day rates and utilization, combined with lower than expected operating costs, primarily related to lower R&M costs due to overall fuel and repair days and lower salaries and travel costs due to reduced mandate on some idle vessels. Adjusted EBITDA was $163 million in the second quarter compared to $154.2 million in the first quarter.

As a reminder, in Q4 of 2024, we reported a $14.3 million FX loss and negatively impacted our adjusted EBITDA. In the first quarter of 2025, we experienced a partial reversal of this FX loss and recorded a $7.6 million FX gain, and in Q2, we experienced an additional FX gain of $11.7 million as a result of the continued weakened U.S. dollar. As it relates to tax expense during the quarter, we reversed the valuation allowance related to the U.S. net operating losses we generated during earlier periods. We made this reversal due to our increased confidence in the sustainability of our global profitability. The reversal resulted in a one-time non-cash increase to net income of $27 million. Operating costs for the second quarter were $170.5 million compared to $166.4 million in Q1.

The increase in costs is due primarily to an increase in salaries and travel and R&M costs as we had one more day of operation in the quarter, together with FX impacts due to the weakening U.S. dollar, the combination of which contributed $4.3 million to the increase. In the quarter, we also had 192 higher idle days, 245 higher dry dock days, and 59 more mobilization days, which contributed to an increase of $700,000 in fuel costs for the quarter. Offsetting these increases were insurance and other operating costs that came in lower than the prior quarter. G&A expense for the second quarter was $31.2 million, $2.1 million higher than the first quarter, due primarily to an increase in personnel costs, as well as an increase in professional fees. We are projecting G&A expense to be about $120 million for 2025, which includes $15 million of non-cash stock-based compensation.

As a reminder, we conduct our business in five operating segments. I refer to the tables in the press release and the segment footnote and results of operations discussions in our Form 10-Q for details of our segment results. In the second quarter, consolidated average day rates were up versus the first quarter. However, results varied by segment, with our Europe/Mediterranean day rates improving 14% and our Americas day rates improving by almost 3%. We saw marginal increases in day rates in our APAC and Middle East regions, offset by a day rate decrease in Africa of about 5% quarter over quarter. Full revenues were up compared to the first quarter, with revenues up in our Americas and Europe/Mediterranean regions by 28% and 27% respectively, quarter over quarter. Our revenues in all other regions decreased compared to Q1, with the largest decrease in our Africa region of 22%.

Regionally, overall gross margin increased in the Americas region by 14 percentage points and in Europe/Mediterranean region by 10 percentage points, but decreased in our other three regions. The increase in the Americas region was due to increases in average day rates and utilization, as well as a minor decrease in operating expenses. The increase in the Europe/Mediterranean region was primarily due to an 8 percentage point increase in utilization and a 14% increase in average day rates due to typical calendar seasonality and a strongly expected North Sea spot market. In our APAC region, gross margin decreased about 2% primarily due to a slight decrease in utilization, partially offset by higher average day rates and slightly lower operating costs.

Our Middle East region also saw a gross margin decrease of about 8% due to a decline in utilization, combined with an increase in operating expenses due to higher fuel costs. The primary reason for the lower utilization was higher dry dock days and higher repair and idle days. In our Africa region, we saw a 12% decrease in gross margin due primarily to lower day rates, lower utilization, and higher R&M and fuel costs resulting from higher dry dock repair and idle days. We generated $97.5 million in free cash flow this quarter compared to $94.7 million in Q1. The free cash flow increase quarter over quarter was primarily attributable to stronger results from operation, lower dry dock and CapEx costs, and higher proceeds from asset sales, partially offset by our use of working capital.

Last quarter, I mentioned that we had not received payment for several quarters from our primary customer in Mexico. We still have not received payment from them, and our outstanding AR balance at the end of June represents approximately 14% of our total trade AR. As mentioned previously, this customer had periods of non-payment in the past, but historically, we have not had any write-offs due to the collectability of their receivables. We continue to monitor and assess this closely. In the second quarter, we made $12.5 million in principal payments on our senior secured term loan, in addition to approximately $1.5 million in other debt repayments related to the financing of recently constructed smaller cruise transport vessels. We also incurred $23.7 million in deferred dry dock costs compared to $43.3 million in the first quarter.

In the quarter, we had 1,195 dry dock days that affected utilization by about 6%. For the year, we are projecting dry dock costs to be about $107 million, which is down about $6 million from our prior call. The decrease is due to the net effect of changes in timing of various 2025 and 2026 projects, in addition to savings generated from our already completed 2025 dry docks. In Q2, we incurred $5.2 million in capital expenditures related to various projects, including ballast water treatment installations, EP system upgrades, and IT upgrades, both onshore and vessel-related. For the year, we still project capital expenditures of $37 million. During Q2, we spent $51 million on share repurchases to bring our total of 2025 repurchases to about $90 million. The Q2 repurchases reduced our shares outstanding by approximately 1.4 million shares.

As Quintin and West mentioned earlier, we successfully refinanced our previous debt instruments to a longer tenured unsecured structure, and we were also successful in entering into a $250 million revolving credit facility. We also announced our newly authorized $500 million share repurchase program. Overall, we believe this new debt capital structure increases financial flexibility for Tidewater, and we are also excited about the opportunity for additional shareholder returns moving forward. On the tariff front, we have not seen a meaningful increase in our costs, and we do not anticipate direct or indirect tariff exposure that would drive a meaningful increase in our costs. We acknowledge that many vendors are still evaluating tariff announcements. As such, the impact of these tariffs on our cost structure is subject to change moving forward. In summary, Q2 was exceptionally strong from an operations and execution standpoint.

We delivered both strong financial results and free cash flow, as well as returning a significant amount of cash to shareholders in the form of share repurchases. We also successfully refinanced our previous debt to a more suitable and flexible structure that aligns with our objectives and needs. While there is some amount of new income uncertainty in the industry related to the timing of incremental vessel demand, the industry long-term fundamentals remain very strong. Despite this uncertainty, we expect to achieve our full-year financial guidance and expect to continue to generate strong free cash flows and profitability each subsequent quarter of the year. We remain optimistic about our current position and about the opportunities that lie ahead for Tidewater. With that, I'll turn it back over to Quintin.

Speaker 0

Thank you, Sam. Janice, would you please open the call up for questions?

Speaker 3

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

Hey, good morning, everyone. Congrats on a nice quarter and congrats, Piers, on your promotion. Quintin, maybe since you brought it up, and I think I've heard it three or four times throughout the call, you brought up the M&A and obviously the flexibility that your new facility and financing and, you know, non-need to keep all the cash on the balance sheet provides you. Would love just to hear an update of kind of what you're seeing out there and if you think there's actually anything actionable in the fairly near term out there since you've been kind of evaluating opportunities for quite some time since your last transaction.

Speaker 0

Hey, Jim. Thanks. I would characterize the discussions over the past several months as becoming more constructive. You know, if you take us back to last summer, everybody was very excited about the out and the near-term outlook, and I think prices for secondhand equipment and for companies got a little bit ahead of where I thought they should be. I believe that people over the last several months have come to terms with what they see as the pace of the offshore cycle and probably just a growing awareness of the uncertainty or volatility that's inherent in our business. That has just brought people back to the table. I am encouraged. It's always hard to know. I joke with West that we've probably been in, you know, due diligence for six years straight and, you know, we get three or four transactions done.

We're still active in the market and we look forward to getting things done, but we've got some very, we've got some significant price hurdles. Right now, just repurchasing our own shares is significant value. I need to make sure that anything that we do outside of that creates just as much or more value for our shareholders.

Yep, that makes sense and is consistent with kind of how you've thought about this in the past. Maybe as a follow-up, as we've gone through last quarterly earnings season and so far this season, it seems like all the talk around, or the thesis around, back half of 2026 and the 2027 and 2028 drilling demand and the deepwater side at least is that all seems to still be in place based on what contracts have been let, what some of the drillers that have reported so far are still talking about. It seems kind of consistent with your comments. I'd love to hear, to whatever extent you have visibility going into next year, maybe its second half and into the years after, just from a demand perspective.

You mentioned a finally kind of balanced supply-demand for the vessels right now where you're not able to push rates, but you're still able to sustain rates. Just kind of trying to put the pieces of the puzzle together to see if we get back to a market sometime next year or into 2027 where you're actually able to push rates again.

That's certainly our house view. I'm going to hand it over to Piers because he's got more visibility with the customers, and he can give you a little bit more color on what he's seen developing in 2026.

Speaker 1

Thank you. Thanks, Jim, for the congratulations. Yeah, I mean, it's, I think, you know, as Quintin said, our house view is definitely we're seeing the drillers starting to pick up contracts and they're being quite public about what they're picking up in 2026. We're certainly seeing that in the tendering activity that we're starting to now see. We always tend to be slightly behind where the drillers are, but I would say we're seeing an uptick in those tenders and pre-tenders coming out for those regions to support the drilling activity. Like we've sort of said in the past, the thing about our business is we're not just a drilling derivative.

Of course, you know, we've got layering onto that subsea construction and we're starting to see those contracts coming into play now, which, you know, maybe you saw a little bit earlier, but now Q4 and into 2026 as well. We've got a very positive outlook in terms of the second half of 2026. We've got a bit of an uptick on some of the production stuff. We're supporting development drilling already. We see other projects coming up not just in the Caribbean, but down in Southern Africa as well and intermediate, like I mentioned. Yeah, it's looking to be a much more positive story as we sort of go into the second half of 2026 and I think we'll have all sort of three production, subsea construction, and drilling all working at the same time.

Once we have that demand story in place, that seriously limited supply will give us the chance to really start pushing rates again like we did in 2023 and 2024, is the intention.

I appreciate all that color, guys, and I'll turn it back. Thanks.

Speaker 0

Thanks, Jim.

Thanks, Jim.

Speaker 3

Your next question comes from the line of Fredrik Stene with Clarksons Securities. Please go ahead.

Speaker 1

Hey, Quintin, and team. Hope you are all well and nice to see a very strong quarter. Absolutely. I think the themes that I wanted to touch upon is, you know, your previous question touched slightly upon it as well. Quintin, in your prepared remarks around the M&A story and what you said now that there could have been three or four transactions that might have been realized at some point, there's always different pieces that, you know, doesn't work out at a specific time. I think the way you phrased yourself and also remembering some of the comments you've given before around M&A makes me feel like you might be a bit more optimistic about, you know, getting things done now than before.

If that's the case, is it because the market itself, while there's still volatility out there, it seems like people have been able to assess that volatility better than what they've been doing before, that there's a calmness amidst all this volatility that could make transaction happen nonetheless?

Speaker 0

Hey, good afternoon, Fredrik. That's exactly what I would say. I would say that people are getting comfortable with the uncertainty levels that are out there. Maybe a year ago, they were a little bit too irrationally bullish on the pace of the recovery. Now they're starting to feel the 26-year fill-up for the drillers. They're starting to see what the vessel supply is going to be required. They're not seeing any vessel supply coming in. Everybody's getting real comfortable with the recovery that they see playing out and the pace of it. As a result, I think it's settled people into some expectations that allow these conversations to be more constructive. My hope is, yeah, I would say on balance, quarter over quarter, I'm a little bullish about the opportunity to get some things done. It's always difficult to say because everyone has different price expectations.

We just have a firm expectation of value creation, and we've got an opportunity to repurchase shares if we need to. We'll deploy capital in the most constructive way. There's always a benefit in acquiring vessels that will reduce the age of the fleet, that enhances a particular region for strategic reasons, for competitive and balanced reasons, as well as access reasons. No, I'm generally more bullish now than I was even over the past nine months. I'm hopeful that we can get some things done, but at the same time, we'll take it as it comes.

Speaker 1

Perfect. Thank you very much. One on the outlook for the year, you guys gave quite comprehensive commentary now on how you view the rest of the year, and you've reiterated guidance. Clearly, Q1 was stronger than initially expected. Q2 was stronger than initially expected. Delta from when we had this call here in May on the first quarter, what has the outlook for the second half? Is that worse now? Maybe if I try to read a bit between the lines, uptime might be pushed a bit out in time. Any particular call on that would be helpful. As a side question to that, I think for 2024, you initially guided for '24 during the third quarter conference call in 2023. Last year, you waited with guidance one extra quarter because of all this volatility.

Do you think you'll be in a position to guide for 2026 during the third quarter call, or is it still the same type of outlook for next year that there is too early to tell this time around as well?

Speaker 2

Hey, Fredrik. Good afternoon. West, I'll try and parse your question there. I think in the last piece, referring to delaying our guidance from our kind of regular scheduled programming of doing so in Q3 of last year and to Q4 results, at the beginning of the year, I don't know that we're necessarily in a position to confirm that yet. In terms of what we'll do for this coming year, I think in a perfect world, that would be our preference to get guidance out sooner rather than later. Similar to last year, I think we'll have to evaluate the market factors in play to understand our level of confidence in doing so. We'll play that out over the coming months and quarter or so to see what the world looks like heading into 2026, and we'll make that determination when we get there.

I'm going to restate your first question to make sure that we understand it, and that's our second half expectations from the Q1 call into the Q2 call. Is that correct?

Speaker 1

Yeah, how have those changed?

Speaker 2

Sure. I think it is fair to say that our second half expectations have come down as compared to our second half expectations during the Q1 call. Our commentary in the prepared remarks specifically referred to our previous utilization improvements in the back half of the year. I think if you recall, on the last earnings call, and we provided guidance, we expected a more meaningful step up in utilization into Q3 and Q4 that we've backed off a little bit on. We do expect utilization to improve in the back half, but not as substantially as we did in last quarter's call.

When we looked at the full-year guidance, given the outperformance in the first half and still a fairly, you know, constructive back half, we were comfortable to reiterate the full year, but again, did want to differentiate a little bit that expectations have come down a little bit for the back half, particularly as it relates to the step up in utilization that we'd originally expected.

Speaker 1

All right. That's very clear. You stated my question much more simply than I managed to do, so thank you.

Speaker 2

All right. I want to make sure we answered it correctly. Thanks, Fredrik. Appreciate it.

Speaker 1

All right. Thanks, Quintin. Thank you so much. Have a good day. Bye.

Speaker 3

Your next question comes from the line of David Smith with Pickering Energy Partners. Please go ahead.

Good morning. Thank you for taking my question.

Speaker 2

Hey, David.

I think you mentioned Q3 utilization was expected to pick higher. Can you give a rough range of that improvement?

Sorry, for the second quarter into the third?

Right. For the third quarter guidance, I thought your expectation was for utilization to pick higher, and I was just looking at the.

Yeah, that's correct.

Yeah.

Yeah, to quantify, that'd be a few percentage points of utilization improvement into the third quarter from the second.

Okay. I appreciate that because with even a small uptick in utilization, just doing back of the envelope math, right? If I heard the guidance for Q3 revenue down 4%, it kind of suggests average rates in Q3 that are down $1,200 or more. It sounds like you're pretty well contracted for the quarter. I was just hoping to get some color on that lower rate outlook. Is it more driven by mix, are you seeing unfavorable contract rollovers, or maybe there's some healthy conservatism baked in?

Hey, Dave. I'll draw my comments back to, as it relates to day rates, that is the correct implication or inference that you're making. We referred to the day rates in the North Sea and West Africa as softening a bit. As discussed in the prepared remarks, the second quarter in the North Sea was actually relatively strong, which one would expect given, you know, the seasonally favorable time of year. That was positive. I think both in my comments and Piers' comments, we suggested that given some demand pull-off in the North Sea heading into Q3, we'd actually expect that to taper back a little bit. Similarly, in West Africa, given some of the dynamics that Piers discussed related to drilling and some of the time between contracts, we would expect that to come off a little bit.

There's also the, as a reminder that we discussed in the prepared remarks, we also benefited from foreign exchange from FX during the second quarter, even in the day rate line as well as below the line. We're not necessarily forecasting an improvement in FX rates to help push the day rate. When you put all those together, your inference is correct that with a slight utilization improvement, that does imply a printed day rate reduction into the third quarter.

I appreciate that. If I could make a quick follow-up, I just wanted to make sure if I'm understanding the full-year guidance correctly and then the Q3, the midpoint for the full year kind of suggests Q4 vessel margin that steps up about $30 million compared to the Q3 outlook, which would be a pretty strong uplift compared to fourth quarters from prior years. I know you touched on it in the prepared remarks, but could you give just a little more color on that visibility for the activity drivers in Q4?

I will speak to the first part and then let Piers discuss, again, his view on the macro and the activity landscape. Your inference is correct that in order to achieve the midpoint of guidance for the full year, given our Q3, the specificity we provided around Q3, that would imply a fairly meaningful step up into Q4. That is the right read. I will let Piers talk about some of the activity drivers that he sees into Q4.

Speaker 1

Yeah. Thanks, West. Hi, David. Yes, I mean, I think Q3 is going to be a little bit harder than perhaps expected. I think, as I mentioned, Q4, we are already starting to see a number of vendors for some drilling activity in Africa, but also subsea construction is starting to kick in as well. Some of our, you know, we've seen this sort of pairing off of some of our big TSCs that have been very successful down in Namibia supporting drilling campaigns there. There's a slowdown on that, and that's going to pick up again in Q4. That starts driving our more positive response to go towards the end of the year, primarily for Africa, Mozambique, and Angola specifically on that side.

We'll also see that market in Asia because while there's a slight slowdown in Q3, in Q4, we're seeing a number of projects in Australia, which we're expecting to pick up. Sometimes you get these small short blips in our business and waiting for new contracts to come along, and we're starting to see those tenders coming through. As I think we've mentioned on previous calls, subsea construction tends to have a much shorter time frame in terms of they come out in the award in a much quicker time frame. The oil companies tend to have a sort of 6 to 12 months type of window, whereas the construction tenders tend to be sometimes 30 to 90 days of notice. That's what we're dealing with. I think that's, you know, we're seeing that now for the subsea construction piece picking up in Q4.

Speaker 2

Hey, Dave, if I could add one more data point to Piers' commentary, more on the fleet side, just to remind you, we do expect dry dock days to fall half in Q4, which equates to about 3% of utilization.

That's perfect. I really appreciate all the color, and congrats on the great Q2 performance and the debt refi.

Thanks, Dave.

Speaker 3

Your next question comes from the line of Josh Jane with Pickering Energy Partners. Please go ahead.

Thanks. Good morning. First one, I know you talked about some utilization softness in West Africa over the near term, but could you talk about your multi-year outlook there as it seems to be one of the regions when you listen to driller optimism over, you know, 2026, 2027, and beyond? How do you see this playing out versus some of the other regions where you have opportunities to deploy assets over the next couple of years?

Speaker 1

I apologize. I'll take that. We're also very optimistic for Africa. There's always a, as we know, we're in the cyclical nature. I think the way we look at our business when you go through that process, we've obviously been very busy, as I mentioned, in the last six quarters or so supporting drilling in Namibia. That is expected to slow down a little bit over the next year, perhaps. The expectation is that as you go into the second half of 2026, those projects will go into a development phase. When you go into development, that tends to suck up a number of rigs and a significant amount of drilling over a longer period of time, which is some of the work we're now doing in Suriname and Guyana in terms of that development phase of two to three years.

Once those kick in, and we're seeing that in Southern Africa as well, we're supporting some campaigns there. That's going to drive demand for the bigger TSCs. We're also seeing TSOs coming in supporting projects in Congo, Marco Tosi at the moment, so there's some new production on that side. I think there's probably going to be a, not probably, there is going to be a pause on the drilling for the next few quarters. That's what we're, I think, talking about. I think as you go into 2026, you'll start seeing additional exploration and then development as well on top of that as well. You're going to layer in another layer of demand from that side.

I think the other thing, which I think we may have mentioned on the last call, which is we're not particularly active there, but Nigeria seems to be very oriented and have seen a couple of awards or discussions ongoing for the drillers on that side as well. Nigeria is going to suck up a certain amount of supply as well of vessels. Maybe we'll work there, maybe we won't, but that's going to certainly suck up supply from our competitors as well. I think Africa, longer term, has a very positive story. The next few quarters is probably going to be a little bit faster than we've seen in the past. There's a lot of work coming up. We have a very positive long-term outlook for the region.

Thanks for that. Just as my follow-up, how did you all arrive at the $500 million number for the share repurchase program? I think there was a comment in the opening remarks that it was something that you felt comfortable that you would be able to execute within a year on. I'm just curious how you arrived at the $500 million number. Thanks.

Speaker 0

Hey, it's Quintin. I don't want to commit to just a year because there may be some things that come into play over the next year that either accelerate or extend one way or the other. When I look at the cash that we have on hand, and I think about the excess amount that exists today on the balance sheet, since we have our new revolver, we're going to allow ourselves to reduce that balance to a reasonable level. We're generating about $100 million of free cash flow a quarter. In the next year or so, it's certainly very conceivable that we can take advantage of all that entire $500 million amount. That's how we set it. I'd like to do acquisitions, and I'd like to use cash for acquisitions. That may delay us fully utilizing that program within the year, but that's how we got there.

Understood. Thank you very much. I'll turn it back.

Take care.

Speaker 3

There are no further questions at this time. I will now turn the call back over to Quintin Kneen for closing remarks.

Speaker 0

Jeannie, thank you, and thank you, everyone, for listening, and we will update you again in November. Goodbye.