Tidewater - Earnings Call - Q3 2020

Transcript

Operator (participant)

Welcome to earnings conference call, third quarter 2020. My name is Sylvia, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then one, and you'll touch-tone. Please note that this conference is being recorded. I will now turn the call over to Jason Stanley, Vice President of Investor Relations and ESG. Mr. Stanley, you may begin.

Jason Stanley (VP of Investor Relations and ESG)

Thank you, Sylvia. Good morning, everyone, and welcome to Tidewater's earnings conference call for the quarter ended September 30th, 2020. I'm joined on the call this morning by our President and CEO, Quintin Kneen, our Chief Accounting Officer, Sam Rubio, our General Counsel, and Corporate Secretary, Daniel Hudson, and our Vice President of Sales and Marketing, Piers Middleton. During today's call, we'll 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 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, November 6th, 2020, and so 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 measures is included in last evening's press release, and now, with that, I'll turn the call over to Quintin.

Quintin Kneen (President, CEO, and Director)

Thank you, Jason. Good morning again, everyone, and welcome to the third quarter 2020 Tidewater earnings conference call. I'm pleased to say that this has been a solid quarter at Tidewater. Against the ongoing challenges of the pandemic, we continue to successfully execute on the strategy we outlined on the first quarter earnings call. Before we dive into the consolidated quarterly results, review our operating segments, and open the call up for questions, I'd first like to discuss some noteworthy developments at Tidewater since we last spoke. The first is the appointment of two new board members, Lois Zabrocky, President and CEO of International Seaways, and also recently appointed Commodore of the Connecticut Maritime Association, and Darron Anderson, President and CEO of Ranger Energy Services. Both new directors bring broad experience and a diversity of insight to our board's governance and decision-making processes, and we're excited to have them aboard.

Also joining me on the call today is Piers Middleton. Piers joined Tidewater in the third quarter and is leading up global sales and marketing. I'm excited to have Piers on board as we fill out the management team and position Tidewater for the future of offshore energy services. In addition to sales and marketing, Piers will be assisting in the strategic evaluation of hydrocarbon and renewable investment opportunities as we position Tidewater to benefit from the offshore energy activities over the next 20 years. You may have picked up in the press the announcement of our acquisition of 11 crew boats from Hermitage Offshore Services earlier in the fourth quarter. These vessels will strengthen our position in Angola and West Africa and expand our market share with a total of 27 active vessels in the region.

Given their relatively new condition, they will also reduce the average age of our active crew boat fleet because the acquisition forms part of our ongoing fleet rationalization program and opportunistic approach to M&A. As we continue to divest our oldest, least efficient, and least profitable vessels, we create space in the fleet for a higher quality, newer, and more efficient vessel to maintain the right scale of our operations. Given the location of our West Africa shore base, we believe Tidewater will be able to manage these vessels in a manner that will be easily accretive to our fleet profitability. Six of the vessels are already under contract. We continue to focus on reducing our net debt commitments and further improving our peer-leading leverage ratio.

This quarter, Tidewater is once again cash flow positive with $30 million of free cash flow, and for the nine-month period thus far in 2020, we are free cash flow positive even before including the cash generated from asset investments, and we are proud to be on track to be free cash flow positive for the full year 2020. During the third quarter, we repurchased $28 million face value of our 2022 notes for 95% of par. On Tuesday, we launched a tender for another $50 million, and we simultaneously launched a consent for the modification of certain terms within the indenture, principally the financial covenants. We look forward to continuing to reduce this debt and improving our net debt position through our dedication to remaining free cash flow positive.

The debt repurchases in the third quarter and the current tender are part of our ongoing program to position the company to refinance or just simply repay the bonds when they mature in 2022. We stated last quarter that our revised estimated revenue for 2020 was $390 million, and that estimated cash operating margin would be 35%. We now anticipate full year revenue to be approximately $385 million, which is down $5 million from what we estimated as full year revenue on the last call. We still anticipate cash operating margins of 35%, which would result in cash from core operations of $135 million for the year. Further, we budgeted $20 million for frictional costs associated with the pandemic, and we still see that as the annual impact of the crisis.

This is the increased cost of travel and salaries, the cost of quarantining mariners, the cost of fuel to transit vessels coming off hire to their lay-up locations, and the incremental cost of having those vessels in lay-up. In particular, for the fourth quarter, we anticipate higher fuel costs related to vessels transiting to their lay-up position, excess salaries until we can decrew the vessels, which is what we've experienced in the second and third quarters, and then an increase in the lump sum cost of mariner severance as the vessels are decrewed. All in, we see these extra costs in 2020 to be $20 million. This $20 million of pandemic costs gets us down to cash flow of $115 million. General and administrative expenses have remained a focus for Tidewater.

We've been successful in reducing costs wherever possible, both onshore and offshore, and I'm pleased to say that G&A is once again down this quarter to $17 million, with full year now anticipated to be $72 million. This is another $5 million improvement from the $77 million we forecasted on the earlier call, and that gets us to $43 million of cash flow for the year. Our G&A costs continue to come down. That's now seven consecutive quarters of G&A run rate cost reductions. Our annualized G&A expense for the third quarter is under $70 million. As a couple of data points, the combined 2014 annual G&A for Tidewater and GulfMark standalone was $253 million, and the immediate run rate post-merger was $145 million, with a post-integration objective of $100 million. We will continue to seek techniques and processes to remain the low-cost leader in terms of shore-based operations.

However, when we fill the open CFO position, we will see a noticeable increase in G&A costs for that role and its associated support expenses. Vessel disposals are now looking to be $38 million. Last dry dock expenditures are for revised $35 million for the year, which nets us another $3 million. And as I mentioned earlier, we purchased the 11 Hermitage vessels for $5 million, so net vessel investments for the year will be $2 million. We are anticipating a liquidation of working capital, net of taxes, and other costs of $21 million. So all totaled, we are anticipating $43 million of cash flow from vessel operations, less $2 million of net vessel investments, and $21 million of cash from working capital and other for a total of $62 million free cash flow for the year.

All very achievable, but one area that I'm bothered about from a timing of cash receipts perspective is the continued generation of cash from the liquidation of working capital. We have one customer, the National Oil Company of Mexico, which is delaying payments to many of its vendors, including Tidewater. It's disappointing and frustrating that we have to endure this from a BBB rated enterprise, but I am not at this time worried about the ultimate collectibility of the amounts due. Delivering on our free cash flow objective for 2020 will require similar quarterly results in the fourth quarter as we achieved in the second and third quarters, and the formula is the same. We must continue to minimize dry dock expense. We must quickly lay up and decrew idle vessels. We must timely collect what is due to us from large multinationals and National Oil Companies.

Importantly, we have to dispose of older lower specification vessels, all executed well thus far in 2020 and all achievable in the fourth quarter as well. Our vessel disposal program continues to progress with 47 vessels sold year to date. As previously mentioned, we now expect proceeds of $38 million in 2020, and this is somewhat dependent on the ability of the recycling yards to continue to manage their increasing backlog of tonnage from all over the shipping sector. The sale and disposal of our older tonnage, much of it stacked and unlikely to return to service, makes a material impact to stacking costs and further highlights the benefits of rationalizing the fleet during this downturn. All of this leaving us ready to enter a recovered market with a truly optimized and cash-generative fleet.

Now, it's my pleasure to turn the call over to Piers for an overview of the markets in our key operating areas.

Piers Middleton (VP of Sales and Marketing)

Thank you, Quintin. Good morning, everyone. As we mentioned in our earnings release in the third quarter and nine months ended, we generated revenue of $86.5 million and $305.2 million respectively, which is a decrease of 17% for the same nine-month period in 2019. While it is, of course, always disappointing to not be knocking it out of the park every quarter, we believe it is an amazing testament to our teams around the world who have managed to keep the majority of the fleet working and earning against not just the serious headwinds caused by the pandemic and subsequent falloff of short-term vessel demand, but also against our increasingly aggressive competitors fighting to survive. As mentioned in our previous earnings call, our West Africa and Europe and Mediterranean fleets continued to bear the brunt of the decrease in activity.

Globally, we had 45 fewer average active vessels in the third quarter of 2020 than in the third quarter of 2019. In addition, while active utilization slightly decreased from 80% in the same period in 2019 compared to 78% in the third quarter of 2020, we managed to increase utilization by 4% compared to the second quarter. Looking at our results at the regional level, despite the industry downturn, our average day rates across the fleet stayed pretty static compared to the last quarter at $10,500 per day and still up approximately 5% against the same quarter last year. This was still driven by the previous tailwinds of increasing day rates from contracts entered into before the crisis began, but also by careful management of the active versus stacked fleet, helping our regional teams maintain some commercial discipline when bidding for any new work.

Winning work at any cost, in our view, is not a successful long-term strategy. In the America region, we saw revenue decreases of $4.4 million, or roughly 13%, during the quarter ended September 30th, 2020, compared to the quarter ended September 30th, 2019. The decrease is primarily the result of seven fewer active vessels operating in the region year-on-year compared to three in the previous quarter, caused by the lower demand. However, the region still maintained a small vessel operating profit in the third quarter of $107,000 and a year-to-date vessel operating profit of $3.5 million. Utilization for the quarter was at similar levels to 2019 at 82%. The region still faces challenges, but we believe our flight-to-quality tonnage, continued careful control of our operating expenses, and commercial discipline stands us in good stead in the region going forward.

Our Middle East, Asia-Pacific region continued to see strong-ish demand relative to the rest of the world, with utilization and average day rates both ticking up slightly from the second quarter 2020. The active fleet decreased by two vessels from the previous quarter. Our average rates in the region were $8,040 per day compared to $8,009 in Q2 of 2020 and $7,520 per day in Q3 2019. Vessel revenue was up $515,000 compared to Q3 2019, making the vessel operating loss for the year to date $2.5 million compared to a loss of $4.1 million in Q3 2019. We remain positive that demand going forward will remain relatively stable in the region, especially in the Middle East, although we have also had some recent success picking up some contract awards in Asia-Pacific as well.

In the Europe and Mediterranean region, our vessel revenues decreased 14%, or $2.9 million compared to the second quarter of this year. The lower revenue was driven by having five fewer active vessels in the region. However, we were able to increase average rates for the quarter by roughly 5% compared to the second quarter of 2020 and almost 10% compared to the third quarter of 2019. Utilization for the quarter also improved significantly to over 95% compared to 86% for the same quarter last year. The segment reports an operating loss of $3.9 million for the quarter ended September 30th, 2020, compared to an operating loss of $276,000 for the prior year quarter, which mainly is due to decreased revenue.

While the winter months are historically quieter for the European market, we are starting to see some activity in the European and Mediterranean regions from oil companies looking to either reboot campaigns that were delayed from earlier in the year or are hoping to take advantage of the perceived oversupply of idle tonnage by coming out for new longer-term tenders, presumably hoping to pick up some cheap vessel cover going forward. Finally, to West Africa, where the region as a whole continues to struggle, vessel revenues decreased 30%, or $6.6 million compared to the previous quarter. The active vessel count was down by a further 15 vessels from the previous quarter, which allowed us to increase active utilization from 55% during the second quarter of 2020 to 66% in the current quarter.

Average day rates for the region were $9,643, an increase of 5% from where we were this time last year. Vessel operating loss for the area was $10.2 million for the quarter compared to an operating profit for the same period last year of $678,000. The decrease is due mainly to the drop-off in revenue coupled with the cost to mobilize vessels to the lay-up positions. West Africa has been a struggle for everyone through 2020 as we come to terms with the pandemic. But as with the other regions in which we operate, we are starting to see some early green shoots as our clients start to look to open back up.

Recovery will probably be a little slower than other areas, but we are fully committed and believe in the region going forward, as shown by our purchase of the 11 modern crew boats, which will be used to improve and modernize our African fleet. Last word from me, and although I've only been with Tidewater for a month or so, I'd just like to thank all the men and women in the company who've worked so hard to keep our vessels working in what has been a very challenging time. It has been truly impressive to join this company and see that everyone has managed to achieve during such a difficult period. Back over to you, Quintin. Thank you.

Quintin Kneen (President, CEO, and Director)

Thank you, Piers. Great to have you here. Our objective is to generate more cash by operating fewer vessels at higher day rates, operate them at a lower operating cost per vessel, and at a lower G&A cost per vessel. We're doing this while carefully minding the capital expenditure and working capital investments. The company is free cash flow positive, and our objective and compensation are all geared to keeping it that way. And with that, Sylvia, we will open it up for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have a question, please press star, then one, on your touch-tone phone. If you have a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one. Our first question comes from Patrick Fitzgerald from Baird.

Patrick Fitzgerald (Managing Director and High Yield / Distressed Analyst)

Hi, guys. Thanks for taking the question. With respect to the consent solicitation and then the tender and exchange offer, it seems geared to do something with the Troms Offshore credit agreement. And I'm just wondering, what would be the reasoning for taking that out?

Quintin Kneen (President, CEO, and Director)

So right now, and allow me to say, I'll have to defer to the consent and tender documents in their entirety, but I'll give you a quick summary, but please use those as the defining documents. Right now, we have the ability to repay $35 million under the Troms indebtedness. The covenants in the Troms indebtedness mirror what is in the bonds. So if we go for modifications in the bonds, we also have to go for modifications in the Troms debt. Otherwise, we don't really lower the covenant requirements or anything like that because we have two sets that mirror each other, and they both have to be individually modified. So in order to approach the Troms lenders with those modifications, we need some flexibility in order to repay the Troms debt, similar to what's being repaid on the bonds.

Patrick Fitzgerald (Managing Director and High Yield / Distressed Analyst)

Okay, but the rates on the Troms's debt is lower than the secured notes, and they're due later, right?

Quintin Kneen (President, CEO, and Director)

Yeah. It's not our objective to pay off lower coupon, longer dated debt with that modification. What our objective is, is to get the ability to negotiate with the Troms' lenders to modify the covenants the same way that we're modifying them in the bonds.

Patrick Fitzgerald (Managing Director and High Yield / Distressed Analyst)

Okay. And the concern there would be you just don't know what 2021 is going to look like. And if it's bad enough, then you want that covenant flexibility in terms of, I guess, the interest coverage ratio as that steps up.

Quintin Kneen (President, CEO, and Director)

That's right. Obviously, the second wave is hitting us now. As we look into 2021, we've got a good feel for what our baseload is. But the reality is there's a lot of uncertainty in the world today. And so to get the modifications under the bonds is one thing, but it's also very important to get the same covenant modifications with the Troms' debt.

Patrick Fitzgerald (Managing Director and High Yield / Distressed Analyst)

Gotcha. Okay. Thank you very much. In terms of M&A, obviously, you've got a good deal on some of those vessels from recently. But is there anything bigger on the horizon, either in your expectation, either for you guys or for others in the industry?

Quintin Kneen (President, CEO, and Director)

For us, for sure. I can't speak to others in the industry, and there's not enough balancing capacity to do consolidation outside of Tidewater. But we look at opportunities all the time. We continue to seek opportunities. What I look for in consolidation is leveraging our existing economies of scale. I'm not looking to enter any more regions, but I am looking for newer tonnage that we can bring into the fleet and average the fleet down in age and up in overall quality, and at the same time, leverage an established shore-based footprint. This industry is highly fragmented, so it's not an industry where you can globally dictate prices. There's too much fragmentation in order to do that. But you can get concentrated positions in certain areas and do better. And so we look for ways to concentrate our existing locations.

When we talk about the Hermitage vessels, that was a really nice complement to an existing footprint in Angola. So we're able to add 11 vessels. We won't add any head count. We can strengthen our position there and help be defensive as the market is generally oversupplied. And we'll look to do the same in other areas. We're not trying to emphasize Brazil at this point and generally have been pulling out of some specific regions in Southeast Asia, although we're still very focused on Thailand.

Patrick Fitzgerald (Managing Director and High Yield / Distressed Analyst)

Okay. Yeah. And I'm not going to ask you about guidance for 2021 in terms of revenue and cash margins. But in terms of vessel sales and dry dock, what does that look like for 2021?

Quintin Kneen (President, CEO, and Director)

Let me give you just some indications, but we are not completely through the budgeting process for 2021, and there's just a lot of uncertainty in 2021. I expect that dry docks, so that I can keep them in the $15 million-$20 million range in 2021. The reason I feel I can do that, that's lower than I would say the run rate average would be for dry docks of a fleet of our size. The reason I think we can do that is that we did so many dry docks in 2018 and 2019 that we were kind of living off the iron, as we would say. We've got enough boats that have enough paper, legitimacy to work, seaworthy papers, such that we can substitute vessels in and work those vessels as opposed to doing dry docks on otherwise capable vessels.

So we can minimize dry docks to those levels in 2021. Continue to see us shedding lower specification vessels. And quite frankly, the specification bar continues to go up as the industry contracts. So as the industry contracts, vessels that were on the margin, say, six months ago are now in the sale category. So you saw us move vessels into that sale category in the earlier part of 2020. And we'll make another assessment on that as we go into the Q1 period. And probably we'll release it when we release everything else about 2021 on the Q1, on the call we do in Q1 for the Q4 earnings. So in general, I would expect a lower level of asset sales in 2021 just because we're burning through that marginal capacity. But my expectation is it will be in the $15 million-$20 million range as well.

Patrick Fitzgerald (Managing Director and High Yield / Distressed Analyst)

Okay. Last one for me.

Quintin Kneen (President, CEO, and Director)

Okay. Yeah. Go ahead. Yeah. That's fine.

Patrick Fitzgerald (Managing Director and High Yield / Distressed Analyst)

Yeah. Just how much from Mexico would it be? Would they have to pay you to get back to kind of a normalized payables, I mean, receivable situation?

Quintin Kneen (President, CEO, and Director)

$14 million. So they're behind what I would say is $14 million.

Patrick Fitzgerald (Managing Director and High Yield / Distressed Analyst)

Okay. Thanks.

Operator (participant)

Just a reminder, if you have a question, please press star one on your touch-tone phone. We have no further questions.

Quintin Kneen (President, CEO, and Director)

Sylvia, thank you. Everyone, we look forward to updating you again in February. Goodbye.

Operator (participant)

Thank you, ladies and gentlement. This concludes today's conference. Thank you for participating. You may now disconnect.