Tidewater Inc.

Welcome to the earnings conference call second quarter 2019. My name is Adrienne and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touch tone phone. Please note this conference call is being recorded. I'll now turn the call over to Matt Mancheski. Matt Mancheski, you may begin.

Thank you, Adrian. Good morning, everyone, and welcome to Tidewater's earnings conference call for the period ended June 30th, 2019. I'm Matt Mancheski, Tidewater's Vice President of Investor Relations and Corporate Development. I'd like to thank you for your time and interest in Tidewater. With me this morning on the call are our President and CEO, John Renz, Quintin Kneen, our Chief Financial Officer, Geoff Gorski, our Chief Operating Officer, and Bruce Lundstrom, our General Counsel. For today's call agenda, I'll cover a few formalities and then turn the call over to John for his prepared remarks, followed by Quintin's review of our financial results for the period. Following John's closing comments, we will then open up the call for questions. During today's conference call, we may make certain comments that are forward-looking and not statements of historical fact. There are risks and 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 Form 10-Q for additional details on these risk 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, August 13th, 2019, and therefore you are advised that any time-sensitive information may no longer be accurate at the time of any reply. Also during the call, we will present both GAAP and non-GAAP financial measures. The reconciliation of GAAP to non-GAAP measures is included in our last evening's press release. With that, I'll turn the call over to John.

John. Good morning, everyone, and welcome to the Tidewater Earnings Call. The second quarter was a testament to the strategic rationale of the Gulfmark combination completed towards the end of last year, as demonstrated by the margin growth of the combined company. The North Sea market and deepwater vessels more broadly both segments that were enhanced through the acquisition showed continued strengthening during the quarter. In addition, the increased scale allowed for good cost control both on and offshore, resulting in margin expansion relative to both prior quarter and the same time last year. While the seasonal North Sea market strengthened earlier than anticipated and has since moderated to more normalized levels for this time of year, we believe the continued trend of activity levels, which impacts rates and utilization, are moving in the right direction, albeit at a pace that is slower than desired. Revenue was up slightly over the prior quarter due to average day rate increase of $636 per day and active utilization falling by 1.3 percentage points. This is the second consecutive quarter where worldwide average day rates have increased after having consistently declined since the onset of the downturn in 2014. The utilization decline is largely attributable to having 784 active days out of service due to dry docks and reactivations, an increase of 394 days over the first quarter. This difference of 394 days amounts to approximately 2.6 percentage points in active utilization drag relative to the first quarter, resulting in active utilization that is otherwise slightly ahead of the first quarter, but for the additional dockings. We continue to highlight the significant dry dock obligations for ourselves and the industry as a whole, where we estimate that approximately 450 currently active OSVs have or will come due in 2019 for a special survey, and another approximate 425 will be due in 2020. We are not immune to this impact and will continue to experience elevated dry docking costs and downtime as we position our fleet to meet our customers' global demand. Excluding vessels that are currently stacked and anticipated to be reactivated, we anticipate 1,025 and 300 vessel days out of service due to dry docks in the third and fourth quarters, respectively. These estimates may move between quarters based on our customers' needs, but represents our current best estimate. However, in spite of the elevated dry dock schedule, we are committed to being disciplined with our capital, and we will only reactivate or maintain active vessels against contract coverage whose projected margins provide a full payout with a reasonable return on our investment. Overall, this may result in near-term cash outlays as we invest in vessels dockings. However, the overall cash-on-cash returns and long-term strategic positioning of these assets will be meaningful to our shareholders. As an example, we have recently authorized the reactivation of two deepwater PSVs against multi-year contracts and are currently in discussion with a separate customer to reactivate a third deepwater PSV whereby they pre-fund a significant portion of the dry dock which will be earned out over the firm term in addition to an above market average vessel operating margin. These are vessels that were previously projected to be stacked, but the returns warranted the investment. To further illustrate, as part of our disciplined approach to investing in vessels that will best serve our customers, and ultimately our shareholders, in excess of 85% of these vessels that we have projected for dry dock this year have a term contract and for the remaining 15%, we may elect to have those vessels stacked until adequate, visible contract coverage is realized. Our continued focus on high grading the fleet and maximize overall cash generation, as opposed to operating a large fleet as a prime objective, will result in us aggressively moving vessels from active service and responsibly disposing of vessels that no longer meet our return objectives. As a result, it is likely that our active vessel count will continue to trend down throughout the remainder of the year. As lower specification vessel contract coverage winds down or as we reposition vessels to more strategically important markets. Further, it is worth noting that our discipline fleet management is best evidenced by the fact that we are approaching almost 80 vessels sold since the start of 2018. This disposal will lower specification vessels as we simultaneously acquire higher specification vessels like many of the Gulfmark vessels and the two vessels we acquired in the fourth quarter of 2018 will continue to yield excellent outcomes for our stakeholders. We firmly believe that a smaller active fleet with the most commercial options in our primary markets where we can benefit from scale is more valuable than either a larger active vessel count with lower margin or the absolute number of countries in which we operate. To briefly highlight our operating segments, the Americas region had margin expansion in both dollar and percentage terms, resulting from improved dairy rates offset by active utilization declines that is largely attributable to dry dockings and good operating cost control. Cost reductions partially resulted from a one-time favorable adjustment to insurance reserves and reductions associated with disposal of stacked vessels that resulted in lower stack costs. For the Middle East and Asia Pac region, Revenue was flat with the prior quarter with operating costs slightly higher, though about equivalent with the first quarter when accounting for the extra day available in the quarter. Slightly elevated dry dock off-hire was offset by small improvements in average day rates, which were more reflective of vessel mix than material change in rate progression. As previously noted, the results for the European Mediterranean Sea region saw significant benefits from a seasonally strong North Sea market. The $6.5 million, or 23% increase in revenue from the first quarter, yielded an improvement in vessel operating profit of $6.1 million from the prior quarter. The 95% vessel operating profit conversion rate is a testament to the operating leverage and economies of scale embedded in Tidewater's business. Lastly, the West Africa region was the weakest relative to the first quarter with vessel operating margins declining almost 10 percentage points as revenue decreased and operating costs increased. This is attributable to higher maintenance costs and associated downtime as we ensure vessels are operationally fit for our customers as well as stacking of four vessels during the quarter that came off contract or came due for a special survey without immediately visible opportunities to justify the investment in the special survey. As we project the second half of 2019, we anticipate the average active vessel count to drop by 11 vessels in the third quarter and another six vessels in the fourth quarter as we seek to improve active utilization, which we anticipate to be up by two percentage points in third quarter and another two percentage points in the fourth quarter in spite of the high dry dock schedule. Further, we project average day rates to decline just over 1% in the third quarter as the North Sea seasonality tapers off and we realize the effects of legacy contracts that reprice downwards in Mexico and the North Sea. Overall, we expect vessel level margin to drop to the low 34% range in the third quarter before rebounding in the fourth quarter to the 37% range. As mentioned in our press release, our objective of being the most cost-efficient operator in industry is clearly in focus and remain on track to meet our general and administrative run rate objective. The operational integration is complete and we are in the final stage of the system implementation that will begin to drive additional synergies throughout are shore-based infrastructure. Our 2019 exit run rate objective for the general and minimum expense is $87 million. But rest assured that we do not envision that is the best we can achieve. We will continue to five ways of gaining efficiency and cost savings in our business, and we look forward to updating you on our progress. With that, I'll hand the call over to Quintin.