Tidewater Inc Q3 FY2021 Earnings Call

Good morning, and welcome to the Tidewater Reports Results for the 3 months ending September 30, 2021. My name is Brandon, and I'll be your operator for today. Please note, this conference is being recorded. I will now turn the call over to West Gotcher, Vice President of Finance and Investor Relations. You may begin, sir.

Thank you, Brandon. Good morning, everyone, and welcome to Tidewater's earnings conference call for the 3 months ended September 30, 2021. I'm joined on this call this morning by our President and CEO, Quintin Kneen; our Chief Financial 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 and referring to our plans and expectations. There are risks and uncertainties and other factors that may cause the company's actual 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 Form 10-Q for additional details on these factors. This document is available on our website at tdw.com or through the SEC at sec.gov. Information presented on this call speaks only as of today, November 10, 2021. 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 to non-GAAP measures is included in yesterday's press release. And now with that, I'll turn the call over to Quintin.

Thank you, West. Good morning, everyone, and welcome to the Third Quarter 2021 Tidewater Earnings Conference call. Joining me in presenting our prepared remarks, as usual, are Piers Middleton and Sam Rubio. I will open the call with some general commentary on the quarter. Piers will cover the markets in the various geographies in which we operate and then Sam will wrap up the prepared remarks with an overview of the income statement, OpEx, G&A and the balance sheet. And then, of course, we'll open it up for questions. Our call this quarter comes at an exciting and important time for Tidewater. As noted in recent press releases, we've recently successfully priced a new $175 million senior secured note in the Norwegian bond market and the refinancing transaction is scheduled to close in less than a week. These new notes will mature in November of 2026. The proceeds from the note issue will be used to repay all of the existing indebtedness on our balance sheet, which includes the old notes and the legacy Norwegian ship financing. The refinancing is set up to be cash neutral. So upon closing next week, we expect to continue to have approximately $150 million of cash on hand. In addition to our new notes, we anticipate closing on a new $25 million revolving credit facility and establishing a $30 million at-the-market or ATM equity issuance facility shortly after the closing of the refinancing transaction. We don't anticipate the need to utilize our revolving credit facility or the ATM in the near term, given our significant cash position, but both will be available to provide additional cash as needed. Upon closing the refinancing transaction, the revolving credit facility and the ATM facility, Tidewater's capital structure and liquidity profile will be materially strengthened, and these new facilities evidence our commitment to maintaining the strongest balance sheet in the industry. Our new capital structure and liquidity position also enhances our ability to lean into acquisition opportunities. Our commitment to a strong balance sheet will remain, but we are increasingly seeing organic and inorganic opportunities to sensibly grow the business. We expect to increase the pace of vessel reactivations in response to strengthening demand and reiterate our view that all stack vessels should be reactivated by the end of 2022. And that we will have sold all of our vessels classified as available for sale by that time. We should be in a position by the start of 2023 where all the vessels we have will be working. As we proceed through this period of reactivating vessels and improving market fundamentals, I want to bring back into our quarterly discussions, how the pattern of cash flows we generally experience change in each phase of the market cycle. Over the past several years, we have been in the mode of maximizing cash flows by tightly managing labor rate, suppliers and the timing of capital investments. In this phase of the cycle, the ability to do this is at its strongest. And I've been very pleased with what the team has been able to accomplish to continue to generate free cash flow each quarter. As activity increases, we continue to be focused on maximizing cash flow, but the pattern will reflect an initial period of increased spending due to the cost of reactivating vessels, discrete capital investment catch-up and then a base level of cost increases due to mariner and supplier price increases. And so the focus moves at this point in the cycle to revenue growth and margin improvement, and that's where we're at today. In our industry and in the shipping industry broadly, utilization increases come before day rate increases and with the utilization increases comes a period of reactivation costs, some deferred maintenance and labor cost increases. I mentioned this because we're entering this period now. Now don't get me wrong. We're going to get day rate increases during this ramp-up period, too, but they're being offset to some degree by these ramp-up costs that are from a quarterly cash flow perspective. Once we're through the ramp-up period, you continue to get day rate increases and enjoy the maximum benefit of this industry's operating leverage. Consolidation remains something we're focused on, and there are a selection of candidates that fit our strategic objectives. Our philosophy generally supports using equity and all equity relative value combinations. But in most instances, we've seen some component of cash is required to get the deal done. We will remain disciplined on the types of deals we look at and on the relative leverage the deal brings to Tidewater, but we do believe consolidation continues to make sense for Tidewater. We're not going to make a dent in the fragmentation of this global industry and frankly, that's not our goal. But leveraging our economies of scale and positioning ourselves in a variety of comparatively advantaged positions within a particular geography or a vessel class is imminently achievable. Additionally, as we continue to evaluate alternative avenues to increasing our market share in the rapidly evolving offshore renewables business. Tidewater is committed to ESG principles, and we believe that our core competencies as a vessel owner operator extend nicely into the offshore renewables business. Similar to the investments we make in our legacy hydrocarbon business, we are focused on cash flow and each opportunity we evaluate in the offshore renewables business will need to justify itself on underlying economics and returns available to our shareholders. Our improved capital structure and liquidity profile on the closing of the transactions I just mentioned provides us with the flexibility to pursue larger scale offshore renewables opportunities as value-accretive opportunities in that arena present themselves. Moving into our results for the most recent period. The third quarter is, on a seasonal basis, generally the strongest quarter in any given year. This year's third quarter followed that pattern. Revenue utilization were all up sequentially and are the highest we've seen this year. We're encouraged by continued improvement and are particularly encouraged by what we are seeing from a vessel supply and demand perspective as we begin to look into 2022. Day rates were down modestly sequentially driven by geographic mix. Utilization increased nearly 10 percentage points sequentially in our West Africa region, which is our lowest day rate region and with that large uptick in utilization, the mix of day rates caused our composite day rates to slide about $150 to around $10,300 a day. Although the composite day rate was modestly down due to the West Africa mix, operating margins in the region expanded by nearly 700 basis points in the third quarter, and we are encouraged with the progress in this market as this region, as you will recall, was hit especially hard during the pandemic. Further evidence of the strengthening of the West Africa region is a new 5-year contract for 17 vessels that we signed during the third quarter with a super major NOC customer. A component of this contract contemplates the new building of 2 tugboats. The total capital cost for these 2 new vessels is $12 million. We priced the contracts for these vessels, such that the full value of the vessels and our 14% return on capital requirement will be paid over the course of the 5-year contract. This is the type of compelling investment opportunity we are targeting in this environment and investment fully paid for under a contract with many years of incremental earnings power remaining upon completion of the contract. We generated $4 million of free cash flow during the quarter. Free cash flow for the trailing 12 months was $58 million, down from the $84 million as of last quarter. The decline represents $14 million less in asset sale proceeds, and we spent about $11 million on dry dock expense during the third quarter. About $4 million of the dry dock spend was attributable to vessel reactivations. Quarterly revenue was just north of $92 million. Operating costs were slightly higher than we were anticipating largely due to vessels reactivated during the quarter and continued direct costs related to the pandemic. And as a result, margins were 1% below our target for the third quarter. Although margins did expand by about 1% from the second quarter up to 29%. My expectation is that the fourth quarter will come in just above 30%, but that does anticipate a modest reduction in direct pandemic costs, which have proven to be difficult to reduce. As our perception as to the slope of the recovery in our individual geography evolves, we will continue to move vessels in and out of the assets held for sale category. During the third quarter, we sold 1 asset held for sale, added to this category and moved 1 back to the active fleet, leaving our vessels held for sale unchanged from vessels in the second quarter. Vessels in layup cost us $2.7 million in the third quarter, which was down $1.1 million from the second quarter cost and which is now an annualized run rate of $10.8 million. Removing this cost by gainfully employing or disposing of these assets will add that $10.8 million to cash flow in addition to the operating profit from those vessels that go back to work. Our G&A costs increased by about $1.3 million sequentially. Our annualized G&A expense for the third quarter was $72 million compared to an annualized $67 million in the prior quarter. But generally, it was in line with our expectations. We had a bit more professional fees in the quarter than we were budgeting. One of the big cost focuses for 2021 is minimizing the cost of vessels in layup. As I mentioned last quarter, we reduced the annualized run rate of vessels in layup by 31% during the second quarter from $21.5 million down to $14.8 million. And now we have it down to $10.8 million. So we kept the run rate by 50% so far during the year. It's a combination of reactivating vessels, disposing the vessels and reducing the cost per day of the vessels in layup. The cost per day of vessels in layup is down 19% from the second quarter, and the reduction in the number of vessels in the laid-up fleet makes up the remainder to get to the overall reduction of 27%. We now anticipate dry docks for 2021 to be approximately $28 million or about $4 million higher than we anticipated last quarter as we are planning to reactivate more vessels than we thought last quarter due to continued improvement in the market. Third quarter dry dock costs came in at $11 million, below our anticipated spend of $12.7 million. As we noted on last quarter's call, we expected the third quarter to be the heaviest dry dock quarter this year as we had some of the second quarter spend move into the third quarter. And then on top of that, we spent some additional capital on reactivations. And as these things happen, some of the anticipated $12.7 million slipped into the fourth quarter. As it works out, we are now expecting to spend the same amount $11 million on dry docks in the fourth quarter as we did in the third quarter. I'd now like to talk a little bit about what we're currently seeing in the market and what that means for next year. We're now at the highest utilization levels we've seen since the onset of the pandemic. In general in order for day rate prices to increase to be achievable, utilization must reach the point where vessel availability becomes constrained. During the third quarter, that tightness became apparent in certain geographic regions and in certain vessel classes. As a result, there are now pockets of tight supply that have provided for material price increases, some in excess of 50%. We're not yet seeing vessel supply constraints and associated pricing increases in every vessel class and in every geography, but we do view it as a bullish indicator for our business given the cadence of tendering activity for projects into 2022. Looking across the various regions in which we operate, we've seen pockets of strength in West Africa, the Middle East and the Americas regions. Demand is being driven both by a return to work that was delayed during the pandemic and by new projects scheduled for 2022. As I alluded to earlier in the call, the full P&L impact of incremental vessels returning to work takes a quarter or two to come through. And therefore, we anticipate free cash flows to remain positive, but this growth being moderated in the near term as we invest some of the cash in our fleet to take advantage of a strengthening market and no doubt to fund a bit of working capital as the business grows. The decision to reactivate a vessel is predicated on the ability to simultaneously push up day rates and catch market share in a strengthening market, and that's what we are seeing today. That's a quick overview on the quarter and on our outlook. I will now hand the call over to Piers for an update on the vessel market in the various geographies in which we operate.

Thank you, Quintin, and good morning, everyone. Before Sam goes through our numbers in greater detail, I want to talk through some of the themes that emerged during 2021 and that we expect to drive the market going forward into 2022 across all of our regions. The outlook for the sector continues to brighten. And while we still see some COVID-19-related pressures, we are on the whole seeing improved vessel demand across all of our regions, which is helping us to move past the lows of 2020 and resume the progress we saw during the 2018 to 2019 period. Stronger sentiment also appears to be driving an uptick in E&P spending for the year with a full year CapEx of $81 billion expected to be sanctioned globally for 2021, which equates to a 3% rise above the 2014 to 2020 average CapEx spend. While only a small percentage increase, it's still a positive sign for the future. This improved sentiment has been reflected by a steady increase in vessel tendering activity throughout 2021 across all regions. And whilst vessel requirements tend to follow the industry norms we're used to, we're also seeing more and more of our customers, both the IOCs and NOCs focusing their tender requirements around sustainability and emissions matrices from their suppliers. We believe that for a company like Tidewater with our strong balance sheet, this creates an opportunity for us to continue investing in the latest technologies to upgrade our fleet to meet our customers' current and future demands on emissions and sustainability. We view this as a particularly advantageous position as many of our competitors are unable to make these investments due to their continuing financial constraints. Our continued investment in our fleet not only puts us in a great position to be a first choice supplier to our customers, but also continues our commitment towards reaching climate neutrality. Aside from driving day rates and utilization up in 2022, our focus will also be on how we can continue to differentiate ourselves from our competitors. As we mentioned on our last call, the primary factor for the industry to achieve a long-term and sustainable recovery is discipline, not just from Tidewater, but also from all the stakeholders in our industry. This industry is at an inflection point that will require discipline from a vessel reactivation, commercial and operational perspective to support an economically viable market environment. In general, we have seen rate discipline from most of our larger competitors during the last quarter. However, there is still a significant number of smaller owners out in the market who remain in survival mode, and it is imperative that we differentiate ourselves from these companies by maintaining our ships properly, paying our crews fairly, training our crews, maintaining a strong balance sheet and investing in technology to track our emissions and reduce our carbon footprint. In turn, we expect our customers to support first choice suppliers like Tidewater who invest in their people and their fleets. Looking at the regions, various performances quickly over the past quarter, I would like to make special mention at West Africa again, which was very hard hit by the pandemic over the last 12 to 18 months. But we have really started to see the region bounce back in Q3 with significant improvements. Compared to Q2 2021, active utilization is up 10%, and revenue is up $3.3 million, all driven by having more vessels reactivated and back in the water, positive signs that bode well for the future of the region. Lastly, before I hand over to Sam, I want to make clear that whilst we are seeing an increase in tendering activity, as mentioned previously, especially for our large PSV fleet. With our strong balance sheet, we do not feel we have to aggressively chase every long-term charter opportunity. Rather, our focus as we continue to put vessels back into the market from our stacked fleet will be to fix for shorter periods at higher rates to help increase day rates globally as we do believe in this market recovery. And as the tide rises, it is important to keep a certain level of optionality in our fleet mix as the market improves through 2022 and beyond.

Thank you, Piers, and good morning, everyone. I would now like to share our financial results and highlight key points that contributed to these results. My discussion will mainly focus on the quarter-to-quarter performance of the third quarter of 2021 compared to the second quarter of 2021. As mentioned in our press release from yesterday, we reported a net loss of $26.3 million for the quarter, or $0.64 per share. On the operational front, we saw signs of improvement. Our revenue for the third quarter of 2021 was $92.4 million, which is $2.4 million, or approximately 3%, more than the second quarter of 2021. The revenue increase was driven by a significant rise in active utilization to 82%, up from 78% in the previous quarter. Our average active vessel count rose by 1 to 119 from the second quarter, and we had one additional day of operations in the current quarter. However, our average day rate decreased slightly from Q2 to $10,288 per day. The gross margin for Q3 was 29%, slightly higher than Q2. Vessel operating costs for the quarter were $65 million, an increase of $1 million from Q2, resulting from operating one more active vessel and ongoing pandemic-related costs. We had one extra operating day this quarter and reactivated three vessels. In Q3, we recorded a $2.2 million impairment charge, comprised of $1.9 million related to obsolete spare parts and a net charge of $300,000 associated with the addition and transfer of the vessel into and out of our assets held for sale category. During the quarter, we sold six vessels and other assets for net proceeds of $4.4 million and incurred a net loss of $74,000 on these sales. For the year, we have sold 19 vessels and other assets for net proceeds of $34 million, resulting in a net loss of $3 million on these sales. Our operating loss for the quarter was $21.6 million, which is an increase of $1.4 million from Q2, primarily due to higher impairment expenses and increased G&A costs, partly offset by higher revenue. G&A costs for the quarter reached $18 million, up by $1.3 million from Q2, driven by higher professional fees, travel costs, and franchise taxes. G&A costs remain a primary focus for us. Our annualized G&A expense for Q3 was $72 million, though some charges were one-time expenses. When adjusting for this, our annualized run rate aligns with our previous reports. In our last call, we targeted 2021 G&A costs at $68 million, and this remains our goal. During the quarter, we incurred $11 million in deferred dry dock costs compared to $4 million in Q2, as Q3 represented a heavy dry dock period with 285 dry dock days. Some dry docks scheduled for the first half of the year are now taking place, and we expect Q4 to also be heavy in this regard, anticipating costs of $11 million and total 2021 costs around $28 million, an increase of $4 million from our prior estimate mainly due to accelerated vessel reactivations in various regions. Additionally, we incurred about $700,000 in capital expenditures this quarter, with a full-year spend expected to be $6 million. Free cash flow was positive again this quarter at $4.1 million, continuing a positive trend, although lower than prior quarters due to high dry dock activity and reduced asset sale proceeds. Free cash flow over the last twelve months was $58 million, a remarkable achievement given the year we've experienced, and we expect to maintain positive free cash flow moving forward, though reactivation costs may affect it over the coming year. In previous calls, we discussed collection difficulties with a valued customer in Mexico. Our outstanding balance with Pemex was $16 million at the end of September, increasing by $1 million from the end of Q2. While this balance is higher than desired, we maintain open communication with them, and they are proactive in addressing the issue, leading us to anticipate a more normalized balance by year-end. In Q4 of 2019, we began reclassifying vessels on our balance sheet from property and equipment to assets held for sale, starting with 46 vessels. In 2020, we added 30 vessels and sold 53, leaving a balance of 23 at the end of that year. In the first quarter of 2021, we sold three vessels, and from Q2 we sold five vessels and reactivated one back into our active fleet. In Q3, we added two vessels to the assets held for sale category, sold one vessel, and reactivated and transferred another back to the active fleet, leaving us with 14 vessels at the end of Q2, with a book value of $18 million. On October 8, 2021, we announced plans for a $175 million offering of 5-year senior secured bonds in the Nordic bond market, and on October 15, we were pleased to announce the successful pricing and terms of this offering. We expect funding to occur next week, subject to customary closing conditions. The bonds will mature in November 2026 and carry a coupon rate of 8.5% per annum. The net proceeds will be used to repay existing senior secured notes and the Troms Offshore borrowing, including any applicable premiums, with any remaining funds directed toward general corporate purposes. Following that, we plan to close a $25 million revolver and establish a $30 million at-the-market equity issuance facility. We designed the refinancing to be cash flow neutral, maintaining approximately $150 million in liquidity. During Q3 of 2021, we reclassified our senior secured notes from noncurrent to current on our balance sheet as they mature in August 2022. This is a temporary accounting reclassification since funding for our new senior secured notes occurred after filing our quarterly report. I would now like to highlight our regional performance. The Americas region reported an operating loss of $1.8 million for the quarter, improving from a loss of $4.9 million in Q2 2021. This region generated revenue of $24.6 million in Q3, compared to $23.5 million in Q2. The region operated 25 vessels this quarter, unchanged from Q2, with active utilization increasing to 80%, up from 76% in the prior quarter. Day rates also improved to $13,742 per day from $13,162 per day in Q2. The reduction in operating loss was mainly due to higher revenue and lower operating costs, particularly reduced crew costs, as Q2 included $600,000 in mariner severance costs in our Brazil area that did not recur in the current quarter. The Middle East and Asia Pacific region reported an operating loss of $713,000, compared to an operating income of $266,000 in Q2. This area generated revenue of $25.6 million in the current quarter, consistent with Q2, while operating 37 vessels, unchanged from Q2. Active utilization dipped slightly to 87% from 89% in Q2, but day rates increased to $8,623 per day in Q3 from $8,593 in Q2. The decreased operating income stemmed from higher operating costs, notably increased freight and docking costs, as this region recorded 93 dry dock days in the quarter. Our Europe and Mediterranean region had an operating loss of $2.9 million in Q3 compared to $2 million in Q2, with revenue falling by 6% to $21.2 million from $22.5 million in Q2. This area operated 21 vessels during the quarter, unchanged from the previous quarter, and active utilization remained stable at 91%. The market softened somewhat, leading to a drop in day rates from $13,005 in Q2 to $11,890 in the current quarter. The increase in operating loss was largely due to decreased revenue, with operating costs remaining constant. The West Africa region reported an operating loss of $3.7 million in Q3, reduced from a loss of $5.4 million in Q2. Q3 revenue increased to $20.2 million from $16.9 million in Q2. This area operated one additional vessel in Q3, and active utilization rose significantly to 71%, up from 62% in Q2, with day rates increasing slightly to $8,562 per day in Q3 from $8,521 in Q2. The improved operating loss from Q2 was primarily due to higher revenue, slightly offset by increased operating costs from running an additional vessel. This region was among the hardest hit during the pandemic, so we are encouraged by the improved results. In summary, we continue to observe improvements across all areas. The Europe and Mediterranean region experienced a decrease in day rates as the spike seen in Q2 has stabilized. While there was a decline in utilization in other regions, much of it is attributable to ongoing dry dock activities. We are ramping up our vessel reactivations as we see consistent increases in commercial activity, particularly in West Africa. We remain optimistic about the positive trends and expect this momentum to continue into Q4 and beyond.

Well, thank you, Sam. And on that note, I'm going to hand it quickly to Brandon, and we will open it up for questions.

So at this point, we have no questions. I will give a few more seconds just in case.

Well, thank you, everyone. We look forward to updating you again in March. If you have any questions in the meantime, please feel free to reach out to us. Goodbye.

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