Tidewater Inc Q1 FY2020 Earnings Call

Good morning and welcome to the Earnings Conference Call for the First Quarter 2020. My name is Brandon and I’ll be your operator for today. At this time all participants are in a listen-only mode. Please note this conference is being recorded. And now, I will turn the call over to Jason Stanley. Sir, you may begin.

Thank you, Brandon. Good morning everyone and welcome to Tidewater’s earnings conference call for the quarter ended March 31, 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 call this morning by our 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’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 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 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 will turn the call over to Quintin.

Thank you, Jason. Good morning everyone and welcome to the first quarter 2020 Tidewater earnings conference call. I want to begin by addressing the ongoing COVID-19 pandemic and how Tidewater is responding both for our employees and in our operations. I will then share macro observations related to the pandemic before providing our latest outlook for 2020, our consolidated quarterly results, and a detailed review of our operating segments. In our last call, I highlighted that the safety and wellbeing of our employees is our top priority, and we have established strong protocols for safety and emergency communications. As the pandemic situation evolved, I’m proud to say that Tidewater has shown professionalism and dedication, both on our vessels and among our office staff. We have adapted to social distancing, remote work, and new health protocols to keep our employees, their families, and our clients safe. I appreciate everyone’s efforts to help prevent further virus transmission. Beyond our employees, we have seen several direct operational impacts from the pandemic. Travel restrictions have complicated crew changes, and there have been increases in temporary accommodation costs due to quarantine protocols for crew members. Access to technicians and parts for drydocking has also become significantly limited as global logistics are strained. When considering the overall market impact, it’s essential to revisit the challenges within the OSV industry. It remains a sector with substantial structural issues, including customer and supplier consolidation, minimal barriers to entry, and a lack of substitute markets. Despite these challenges, a well-managed OSV company can still generate free cash flow, even in this environment. At Tidewater, we are planning to generate free cash flow in 2020 despite the industry's outlook. Today’s discussion will emphasize our strategy for achieving free cash flow generation moving forward, even as we navigate changes in the market. The surest way to fail in generating free cash flow is to ignore adjustments needed for capital investments and operational scale based on current market conditions. Fleet size does not dictate free cash flow generation capacity. Companies with a range of vessel counts can all produce free cash flow when aligned strategically. With a smaller fleet, ensuring your vessels have higher specifications relative to the active global fleet is vital. High-spec vessels might not always command premium rates, but they often secure more work, contributing to better margins due to increased utilization. As we examine the market conditions, we recognize that we must make difficult choices about which fleet components, personnel, customers, and geographic areas to retain. Identifying which vessels to keep is straightforward—modern, efficient boats are typically preferred. However, retaining the right personnel is more complex, as this industry has many dedicated individuals. Choosing which customers to engage with is also critical, emphasizing those who foster mutually beneficial relationships. It is essential to concentrate on specific geographic areas based on where our business thrives, rather than spreading ourselves too thin. Historically, Tidewater operated a broad fleet with significant geographic spread, which worked well when demand consistently trended upward. Currently, we are shifting towards a more focused and scalable operational model. Over the last 18 months, we've been focusing on embracing new technologies and reshaping our geographic strategy within the industry. This process is challenging, particularly when it may increase short-term costs, such as severance and layup expenses. However, initial cash flow from asset disposals and temporary drydock postponements can help mitigate these impacts. Despite the difficult environment for OSV operations, there is still a base level of demand for non-drilling work that ensures many vessels remain operational. We project that global vessel activity will decline by 20% to 25% in the coming year, which suggests a significant mismatch between vessel supply and demand. This decline could lead to reduced day rates as vessels compete for limited available contracts. While past downturns benefitted from long-term contracts, this time, the absence of such buffers amplifies the challenges we face. Moving forward, we must streamline our operations and allocate our resources effectively. Our aim is to potentially reduce our fleet to a level that reflects current market demands while taking advantage of opportunities for scrapping older vessels. We expect to generate $39 million in cash from vessel disposals this year, starting with $10.5 million raised in the first quarter. Recent issues with our backlog include reductions due to demand decreases and delays in bringing vessels back on hire because of pandemic-related shutdowns. Our projected revenue loss is about $100 million for 2020. Enhanced efforts are necessary to manage expenses and address market conditions effectively. In summary, we anticipate a revenue of around $395 million for 2020, with a gross margin of 35%. After accounting for various costs and adjustments, we expect the free cash flow to be approximately $65 million. With dedication to ongoing improvements in operations and strategic decisions, we are committed to adapting and overcoming the current challenges faced in the market. Thank you, and with that, we will now open the floor for questions.

And from Clarksons Platou, we have Turner Holm. Please go ahead.

Hope you all are keeping safe and Quintin, thanks for the detailed cash flow outlook in 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, and 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?

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

I wouldn’t expect so, but I thought I’d just make the point. And then secondly, you discussed some of the structural issues with the industry, Quintin. To that regard, your consolidation has been an oft-discussed topic, and in this environment, 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 controls or in some way participate in consolidation without necessarily stretching the balance sheet.

Absolutely. Any type of legitimate cooperation, whether it’s managing vessels for other people, pooling vessels, outright consolidation, or non-recourse debt structures where you build off balance and you get a little bit of the upside with a call option on both. All of that is out there and being discussed, and I would say that over the past four weeks, the activities in 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 debt loads that are out there, perhaps there are some other cooperative arrangements that, of course, are legitimate but allow us to act as a team in defending the industry.

Sure, and then sort of lastly, I guess, I wonder how you think this cycle is going to play out in the medium and longer term. You mentioned that this cycle is seeing 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 in place. Just curious how you think the cycle plays out?

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 spec. So I do expect this business to pop up; I don’t know when it’s going to be. There are 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 pull back by majors and super majors in that area, and I’m not sure that they have the ability to come back, quite frankly. I’m worried about if the pandemic takes hold in the continent of Africa, how long it takes to clear. So there are 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 snap back; 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 any— I think they naturally clear faster than any market. So I do expect to see that. In the North Sea, I see it in the correction center. But there are certain areas, principally West Africa, that I’m worried about. Asia has long been oversupplied and we’ve talked about this beginning in the 2014 downturn. I don’t think it gets any worse, but I don’t think it accelerates any faster.

Okay, and I guess I have a more follow-up; maybe while I have you on the line here. And not just how you see the activity towards developing through the year, and you mentioned something on the order of 20% to 25%. How do you kind of think through those scenarios? I’m sure there is a lot of sensitivity on the upside and downside. And presumably that 20% to 25% is the basis for your cash flow bridge that you built this. Is that 20% to 25% something like? How do you think about that relative to the rig count so you can 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.

Yes, I appreciate the reason for the question, and as I mentioned, it is a bit of a fool’s errand 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 the spot market that didn’t happen. I think that when we’re going through periods like this, it’s important to prepare for those types of downturns, and what I wanted to lay out for everyone on the call is that, even with a downturn of that magnitude, this company is prepared to weather the storm, quite frankly. The optimism that you alluded 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.

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

Thanks, Turner. Stay safe.

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

I wanted to ask about your $33 million drydock 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?

Yes.

Absolutely, it does. But a lot of those vessels have been on contracts that have been cancelled, so they’re just going into layup, and there are not many of those. But there will be some that are going to the scrap yard. Definitely, the vessels that we had in layup prior to this pullback are more likely to go to the scrap yard to make room for these vessels that are coming off hire. The order of magnitude is hard to say right now, but it could easily be 20 to 25 vessels; could it be more?

Okay, so in order to get those if they go into layup to get those back out. You would have to spend $20 million that you were expected to spend this year, is that correct?

That’s right. You will eventually have to spend that money. You can work with class societies to give extensions by the month. But again, it’s a cost of the business, and if you’re going to bring that vessel active or keep it active, you’re going to end up spending that money. So drydock is a delay provided you’re going back to the same fleet count you were at; active fleet counts.

Okay, and then are you seeing other operators doing the same thing?

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.

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

The drilling pieces give you much less; 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. If you have four vessels that are doing both drill and 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 it was the spot market work, that work is still more drilling related and I feel comfortable with it because if you’re still drilling, it’s at risk.

Okay. And then, so these asset dispositions—$39 million for the year, $10 million roughly in the first quarter—are these all scrapped or some of them going into other industries?

No, we actually look to, I would prefer, of course, to sell them out of the industry into some other function. There’s not a lot— I indicated, there’s not a real big secondary market for these vessels, but there’s some. Very often, they get used for not oil and gas offshore related, cargo transportation. Very often, they can be used as shuttle vessels. So if you see some of them using small ones in the barge work. Yes, 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 the scrapping programs I think will be accelerated as we go into the second and third quarters.

Okay, so if your $39 million how many vessels is that, if you don’t mind me asking?

The $39 million was originally; Sam, how many were in the investment held for sale category? 46.

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

So it’s not a lot in the grand scheme of things. In scrapping, you can probably net $200,000 to $400,000, and the sale is probably $900,000 to $1.3 million depending on the vessel specification and size of the vessel. All of that is the order of magnitude between those two active vessels.

Okay, great. Last one to me. I just wanted to ask about the Troms Offshore subsidiary; there are six vessels there? Is that correct?

That’s correct.

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

So those are very capable North Sea vessels. I couldn’t tell you if they’re all working today. There are 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 what—yes, this is a commoditized industry, don’t get me wrong. But nothing is 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 at hire right now, but I’m not overly classified on those vessels.

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

I'm sorry, your question wasn't about the subsidiary; it was about the Norwegian debt on those vessels.

Yes.

That’s perfectly long dated; yes. I’m not worried about that at all.

From Rabadi and Company, we have Bob Rabadi. Please go ahead.

It's a challenging time, but great job. There is a wealth of detailed information you included. At the end of the year, you reviewed the fleet and made adjustments, removing 46 units—four are still active, while 42 are not. You’ve clearly put in a lot of effort to update the relevant information, including the cost aspects. Considering the granularity in your estimates, will you be taking further steps regarding drydocking and the changes brought on by COVID? You’ve reassessed the fleet's composition and the decisions on what to retain and what to let go. However, it remains a dynamic situation, which complicates immediate decisions. Do you plan to provide updates similar to the end-of-year fleet review since that seems crucial for reducing costs?

Absolutely, yes. We’ve certainly made some assumptions as we’ve gone through the processes of trying to drive 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 scrap yard and some going to layup, we’re still in the process of evaluating that and we’ll make that determination, and we’ll 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 once we go through the remainder of the year.

And then when you ran through the numbers through, you did say that SG&A you 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 so?

Yes, definitely brought it down from what I think we said on the last call, which was $83 million. Right now we’re still evaluating what is the right shore-based footprint. So I think there’s a room there to naturally—obviously, we’re running a little lower rate than we had budgeted. There’s a couple of things on my to-do list. One is, 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, there is definitely reasons to believe that number should be able to go down. There is a lower limit, quite frankly, just because not all of those personnel—and really what we’re talking about is closing down offices. And what we’re experiencing even in the offices that we’re in the process of shutting down, like in Southeast Asia, you’re still on the hook for six months’ worth of cost as you run out leases and you run out personnel’s and severances and things like that. So 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. But yes, so when I think about G&A, I think about it in cost per active day. So the numbers that we have historically run that are about $1,450 per active day. Okay, as that active 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 yes, and there are fixed cost elements that I have to deal with. So that’s the way I think about G&A cost, and as we go through the business and reset the business, that’s the number I think about.

It is clear that you have a significant task ahead of you concerning the active fleet size, which is decreasing, indicating that you have ample opportunity to make progress. I imagine you are aware of this. Additionally, how disappointed will you be over the next six to nine months after having taken steps towards consolidation? All of the efforts you are making regarding reducing fleet size and managing costs will make things much more manageable. I noticed that Harvey Gulf mentioned they have renewed two vessels while actively seeking consolidation. There appear to be more options available as we entered the year, especially with the market improving. The emphasis on consolidation seems crucial for achieving success going forward.

Well, I 100% agree with you. I mean, consolidation is the answer to this thought. Okay. My issue is getting the capital providers to understand that they’re not getting borrowed returns because, unfortunately, there’s just still not enough vessel companies that have cleaned their balance sheets. But as I mentioned when I was doing the talk earlier, there’s a lot more dialogue going on now than there has been in the past six months. So I’m actually just pointing now that we haven’t gotten any more consolidation done either to us or with somebody else in the industry. I welcome Harvey Gulf and others to consolidate the industry with us; I mean, that’s fantastic. But yes, 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 and disadvantaged my current equity holders.

Clearly the benefits of consolidation today probably worth more money than clearly what they were three months.

Absolutely. Anytime the margins get thinner, the benefit from reducing SG&A is all that much more disproportionate.

Thanks, Quintin.

From Southpaw, we have Ceki Medina. Please go ahead.

I’ve got a question about competitors, and I know this was, I know you touched upon this a little bit before you’ve 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 compartmentalize how they respond to this challenge? 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 SPS or layups? Do you see that’s continuing or have people come to the end of the road?

Honestly, you know I still see it continuing, unfortunately. Some of it, a 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, of course, I’ve been really focused on my own business and the type of our business. But I’m certainly always going to have feelers out on one of the competitors. What frustrates me more than anything is there—not that we’re just a player, but a medium-sized player in Norway that just got built out is now putting boats to work at cash flow breakeven or just below that, and that’s idiocy. Why would a bank refinance a company just so that it can put boats to work at breakeven? If that kind of activity happens out there, unfortunately, 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.

Thanks, Ceki. Talk soon.

From Nationwide, we have Christian Donoso. Please go ahead.

Thanks for the calls and for 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?

No, in fact. We did a bonds incentive tender in Q4 and we really widened down the covenants, which was quite fortuitous. We did it because we ended up having to pay $180 to buy back the bond, so I tried to do as much as possible in exchange for that premium. So no, I’m actually not worried about the bonds at this point.

Okay, and I know the debt is due in two years out. In your time, but any initial thoughts on when you guys are going to start thinking about refi year? Any ideas?

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 penalty even to the day before maturity. There’s a minimum $1 million prepayment penalty, if you will. So it’s frustrating. As long as there is their take-back paper in the bankruptcy, there are a lot of privileges around that debt. So it’s good paper, and as a result, we’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.

Okay, and in terms of the markets, you mentioned on the last call that you were planning to exit; how are those exits proceeding and planning?

Pulling out of Brazil is always a multi-year process, unfortunately. In Southeast Asia, we will be closing the office on June 30, 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 look for any other opportunities. I was hopeful at the beginning of the year because the market was improving in Brazil as well as in other places. But there might be a way to exit Brazil via a sales process, but unfortunately, that’s off the table today.

I think that’s it. Just a quick one. In terms of the backlog, you provided some visibility in terms of what is production services versus drilling or is not—you don’t have that granularity?

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 is 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, so we don’t have a good guide for that, unfortunately.

Okay, thank you.

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

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 at Maples 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 telemarketing. This is a remarkable achievement that was inconceivable 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’m 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 will once again prove themselves as we emerge from this downturn, strong and well-positioned to capture the recovery market. Thank you, and we look forward to updating you again in August. Goodbye.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for joining. You may now disconnect.