Tidewater Inc.

Welcome to the Earnings Conference Call, 4th Quarter 2019. My name is John Aubrey, Operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you do have a question, press star then 1 on your touch-tone phone. Please note the conference is being recorded. Now I'll turn the call over to Jason Stanley, Vice President, Investor Relations and Marketing. Jason, you may begin.

Thank you, John. Good morning, everyone, and welcome to Tidewater's earnings conference call for the quarter and full year ended December 31st, 2019. I'm Jason Stanley, Tidewater's Vice President of Investor Relations, and 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, Quintin Kneen, our Chief Accounting Officer, Sam Rubio, and our General Counsel and Corporate Secretary, Daniel Hudson. After I cover a few formalities, I'll send a call over to Quintin for prepared remarks and then we'll open up the call for you to ask questions. During today's conference call, we may make certain comments that are forward-looking and not statements of historical fact. 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 Form 10-K 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 3, 2019, and 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 GAAPs and non-GAAP measures is included in last evening's press release. And now with that, I'll turn the call over to Quintin.

Thank you, Jason. Good morning, everyone, and welcome to the fourth quarter 2019 Tidewater Earnings Conference Call. We have been quite busy over the past year, and especially so over the past six months, transforming our business so that we can prosper even in today's challenging offshore energy market. We definitely see the offshore vessel market improving, although we're determined to get back to acceptable levels of pre-cash flow even without the market's help. I spoke a lot on the last call about the transformation we are going through at Tidewater. We are adjusting our shore basin infrastructure and modifying our culture to embrace a returns-based business philosophy. We have the leading position and the strongest balance sheet in a very challenging industry. Our employees know that and it makes a difference. Our customers know that and it makes a difference. Our suppliers know that and it makes a difference. Tidewater is committed to making a difference in this industry. On today's call, I'm going to talk to you about where we think the industry needs to go. I'm also going to focus on free cash flow because we feel this metric is going to be the key to managing the business back to acceptable returns. And then I'm going to talk about the company's performance by region. I want to open up the main dialogue on the call today in the discussion about the need to transform the industry in which we operate. Transforming the company is difficult, but at least it's within your control. Or at least that's what I tell myself. Transforming the industry is a order of magnitude more challenging. It has to be done. The industry is highly fragmented. There are nearly 600 participants and only four, including Tidewater, have more than 2.5% of the market. The industry has lethal levels of debt that is preventing consolidation because many capital holders are looking for par returns. Par returns are not going to happen. The cavalry isn't coming. The market is not going to save those capital providers. The business model of selling vessels by day is as ingrained in the DNA of your oil field as it is advantageous to any of these companies, and thereby hangs the tail. The model of selling vessels by the day results in customers hiring their own vessels and underutilizing that vessel. In a recovered market, it's inefficient for them, and it works against the goal of reducing carbon emissions in the shipping community. Ship vessel freight is the most carbon-friendly means of transportation, but everyone hiring their own vessel destroys that accomplishment. Everyone hiring their own vessel substantially increases the chance of a safety or security event. I believe we will see the industry eventually gravitate to regional super-consolidators who will be able to leverage a scalable shore-based footprint to operate the most vessels possible at the lowest cost possible in a particular region. Achieving regional super consolidation will allow us to promote a logistics model consistent with most logistical movement around the world, but it requires enough of a presence in any given geography to influence the change, and that can only happen with consolidation. Moving away from the day rate pricing model will result in a business that is better for the environment, better for our employees, and provides more logistical options for our customers. But it takes fewer vessels globally to execute this business model. So if you're not part of the regional super consolidation that we think is inevitable, you're very likely to be left with a bucket of rust. So with that, let's talk about Tidewater and free cash flow. For the year 2019, without regards to non-recurring or special items, the business had $6 million of positive free cash flow. We made significant progress in the fourth quarter and reversed the negative free cash flow position we were in at the end of the third quarter by generating $12 million of positive free cash flow in the fourth quarter. Our principal objective of today's call is to walk you through how we see cash flow improving in 2020. Absolute free cash flow is the metric we are using in 2020 for incentive compensation. It's the metric we are using for executives as well as for the managing directors of our operating regions. I'm a big proponent of unlevered free cash flow. It's been described as aligned with the ideas of Cray and Dodd and Copeland et al. If I unvarnished, I mean before any special items. Financial Statements. So you will notice that we added a new reconciliation to the press release that computes free cash flow with the subtotal before proceeds from vessel sales. I think you will find both amounts valuable in the evaluation of sustainable free cash flow. I want to describe our pathway to increasing free cash flow from the $6 million in 2019 by dividing it into four categories. Increased cash flow from reduced G&A. Increased cash flow from vessel disposals. increased cash flow from reducing investments in vessels and increased cash flow from core vessel operations. Throughout 2019, we have been hard at work retooling the shore base operations. Significant work was done installing a state-of-the-art information system and removing two layers of management. Our objective was to establish the most automated, most scalable, and most cost-effective global platform in the industry, and we have achieved that objective. We're not done making improvements. I'm pleased with our current survey setup and I look forward to testing its scalability through additional consolidation as we proceed through the remainder of the recovery. Based on our efforts to streamline the organization, we anticipate G&A expense to be $83 million for 2020, a cash flow improvement of at least $10 million when compared to the 2019 G&A expense of $104 million. Recall that some G&A is not cash, so it's not the absolute difference. As it relates to this improvement, the work is already done. Our normalized GNA for the fourth quarter was 20.3 million, which is 81.2 million on an annual basis. Our annualized January run rate was 78.6 million, which will allow us to meet our objective even after accounting for adding back the CFO position. I should note that the recruiting process for CFO is still ongoing. I had hoped to conclude the search by early in the first quarter of 2020, but it's looking like late Q1 or early Q2. In addition to our efforts You will notice that we divided the fleet into two categories on the balance sheet. The fleet we anticipate being a part of the active fleet for the foreseeable future, we kept classified as net property and equipment. And the portion of the fleet we intend to dispose of, we reclassified as assets held for sale. Assets held for sale to 46 vessels that we are in the process of selling or scrapping, and we have marked the value of these assets to their estimated net realizable value of $39.3 million. Marking these assets to their net realizable value results in the fourth quarter of $26.7 million. Our intention is to liquidate these assets in 2020, which will result in a cash flow improvement of at least $10 million when compared to the proceeds we received in 2019. We also wrote off a partially constructed vessel in Brazil that was on the books for $5.8 million because we determined we could not pursue possibilities on that particular investment. In total, that results in the fourth quarter impairment charge of $32.5 million. Thus far in 2020, we have sold five vessels for $4 million, and we have an additional nine vessels in the final stages of being sold. Also, recall that including our operating expense for 2019 is $12 million related to the basic oversight, warfares, and security of the vessels in layup. As it relates to fleet investments, as we have discussed in prior calls, the fleet went through a very heavy dry dock period in 2019. Total spend for 2019 was $71 million. Our current expectation for dry dock investment in 2020 is $53 million, which should result in a cash flow improvement of $18 million in 2020. A few more data points on dry dock. to try and give you a sense for the annual fluctuation and demonstrate the unusually high level of vessel investment that we made in 2019. Cash spent on dry docks for the full year 2018 was $26 million for a fleet of 142 active vessels. As I just mentioned, it's $71 million in 2019 for a fleet of 162 active vessels. We anticipate it will be $53 million in 2020 and $35 million in 2021, both for a fleet of 150 active vessels. As a reminder, when we evaluate whether or not to continue to keep a vessel active or to reactivate a vessel out of layup, or to really two sides of the same coin, we consider direct aspects such as the payback period and its overall result on pre-cash flow generation and the return on invested capital, but also the indirect economic impact of having more vessels in the market. Modern vessels where the market is no longer distressed, such as the 1,000-square-meter deck vessel, It's an easy computation. But the indirect impact on other vessels in the market has a lot to do with how many vessels are in the local market, how many vessels you currently have in a given market, how your vessels stack up to other vessels in the market, and geographically how remote you are from other markets. Our market is very commoditized. And although no market is perfectly commoditized, it certainly feels that ours is on the way sometimes. but there is a ripple effect on all of the remaining vessels in the global vessel market and there is an impact on the slope of the recovery. That impact can be miniscule to the extent to keeping the boat active in a relatively isolated geographic area, but it's critical to consider at least the impact on the world supply and demand balance. Our fleet size has been shrinking because we have been withholding capacity on the marginal vessel class, which is to say the lowest specification vessel category that is currently generally employable. Our intention is not to dispose of these vessels, but to hold them off the market until market conditions improve. We have 19 vessels in layup today that fit into this category. Okay, so let's get back to free cash flow improvements year over year. We're on the second part of vessel investments, which is CapEx. CapEx for 2020 is anticipated to be $8 million, which is an improvement in cash flow of $10 million over 2019. And finally, most importantly, We are making improvements to our core business of operating vessels. A very important but difficult task we have in front of us is improving our active utilization. As a reminder, active utilization is the percent of time a fully crewed vessel is billing a customer. Occasions that reduce active utilization are things like being down for repair, a vessel waiting on pre-hire approvals by a customer, idle time in the market waiting for a job, and similar situations. The fourth quarter showed an increase in active utilization up to 81.4% from 80.4% in the third quarter. A one percentage point increase in active utilization is $6 million per year increase in pre-tax profit. Improving active utilization is one of the most challenging aspects of our business because it involves all aspects of our operations, from crewing to maintenance to chartering. Everything's involved. Everyone has to work together to better coordinate and improve our activities for active utilization to increase. This is one of the reasons we have been intensely focused on making sure our information system provides timely, transparent, and relative operating information that is easy to use and always up-to-date. So to sum up this part of the discussion, we were $6 million in cash flow positive in 2019. We anticipate improving that in 2020 by approximately $10 million due to reduced spending on G&A. We anticipate improving at approximately $18 million due to reduced spending on dry dunks. and we anticipate improving it by at least $10 million for additional proceeds from Bustle Disposals. And then we are anticipating further improvements from approved active utilization. None of this requires an improving market. None of it is a given. It will take additional dedication from the employee base and proper alignment of compensation incentives, but I'm confident that getting cash flow over $50 million in 2020 is very achievable. As you can tell from the new table on pre-cash flow, we added to the press release. In the fourth quarter, we are positive pre-cash flow from operations, positive pre-cash flow before vessel disposals, positive pre-cash flow for the quarter, and positive pre-cash flow for the year. And for the fourth quarter, we are pre-cash flow positive before selling vessels, and was a horrendously heavy dry dock quarter. It's important to know the proceeds from disposals. As we move away from this period of benefiting from the proceeds of disposals and assets, The business will benefit from the reduced spend on overseeing these vessels in layup, which I indicated was $12 million in 2019 as in and is anticipated to be $13 million in 2020. The increase in 2020 is due to the layup vessels that we have in Brazil. They account for the majority of the increase in the spend in 2020. On a consolidated basis, revenue was down slightly, which is better than expected for the fourth quarter. Active utilization was up, which is nice, but average daily rate was down about $80. The operational story for the fourth quarter was the increase in operation expense, which bounced up approximately $5 million in the fourth quarter to $86 million due to illegal accrual in Brazil, and an above-average spread of vessel repairs and maintenance, which resulted in additional fuel costs as well. As I mentioned, included in the $86 million is approximately $4.4 million or $12 million per year of costs related to managing the fleet and layout. When we last spoke, I anticipated that we would see a similar number of net vessels going into stack in the fourth quarter as we did in the third quarter, within which we were down five vessels. We did better than I anticipated. We were down one vessel for the quarter. Again, it's all about generating an acceptable cash return and certainly not about working vessels for practice. Boats on the margin of generating an acceptable cash return did a bit better than I anticipated, and we kept them working through the quarter. The heavy dry dock schedule we are experiencing settles down this year, but dry dock schedule is still disproportionately heavy in the first half of 2020. Of the $53 million of dry dock we have scheduled for 2020, I anticipate $30 million in the first quarter, $12 million in the second quarter, and $11 million in the second half of 2020. A fleet of our current size should experience, on average, $9.5 million of dry dock expense per quarter, or $38 million per year. As indicated by the second quarter and second half 2020 dry dock guidance, we are getting to the period in the five-year dry dock cycle where we will be spending less than the average. As I indicated earlier, the expectation for the full year 2021 is $35 million. As I mentioned on the last quarter's call, Tidewater has been everywhere since But we are de-emphasizing the geographic areas where we have low returns on capital, such as Brazil and Southeast Asia. In addition, any work outside of our primary shore-based locations must require a commensurate premium for being far removed from existing infrastructure. Exiting areas like Brazil and Southeast Asia is always slower than preferred because we have vessels there which are under long-term contracts with customers that we work with around the world. So the process of rebalancing the portfolio will take some time. The fourth quarter is one of the softer two quarters of the year. The first quarter is the other. This is due to weather and wind conditions in the North Sea during the winter months and calendar year contracting behavior in other areas of the world. The fourth quarter this year was not that bad. In the North Sea, demand was buoyed by an unusually high level of construction projects, principally the Nord Stream project. This kept the spot market strong through most of the fourth quarter. Average day rates and utilization levels remain flat on a sequential quarterly basis due to this demand. West Africa had a tough fourth quarter. The region has had substantial dry dock activity throughout 2019 and suffered a few major mechanical failures, which resulted in active utilization numbers decreasing by two percentage points. The difficulty with mechanical failures in Africa is not just the loss of revenue, it's the added cost to the repairs and fuels. In areas like West Africa, you can't just saunter into a dry dock facility. You often have to journey for several days to get to a repair facility. And then getting parts and technicians into the dry dock location requires significant administrative time. As a result, West Africa had a difficult and low-performing fourth quarter, and due to dry dock difficulties, had a difficult third quarter as well. But I'm optimistic that we will see an improvement in West Africa as we get the significant dry dock activity behind us. Africa is an important region for tidewater. and Angola in Nigeria. We operate through joint ventures. Our Angolan joint venture partners in the process of divesting its non-core investments and our joint venture with them is one of the many that are partners in the process of divesting. You may have read about this divestiture process in the press and we are of course participating and cooperating in the process. It doesn't have an impact on operations and there's nothing to report at this time. We just wanted to mention the intention of our partner since it will be a public process. The Middle East Asia Pacific region had a good quarter. It was a bit of a transition quarter. Three vessels were added to the active register, and even though three vessels entered the region and three vessels were in dry dock, active utilization was higher than it's been in the past five quarters. The average day rate was up nicely, $226 a day. We lost a bit of ground on the cost side due to vessels in transition in an unusually heavy maintenance quarter, but I'm very bullish on the outlook for this region in 2020. The Americas region is another region that performed well during the fourth quarter, but it had one isolated special item of note. Overall revenue was up on the same number of active vessels, which is always nice. Active people's utilization was up two percentage points, but average day rates were down about $170 per day. On the operating cost side, we made an accrual for just over $2 million for some old, individually insignificant labor and customs claims in Brazil that we now believe will result in more exposure. After the legal accrual, we would have had slightly higher vessel operating margins for the quarter. As I look to the first half of 2020, I still see tightening in the West Africa market, as I mentioned on the last quarter, but I see it later in the first half as opposed to what I thought earlier, which was better by the start of the second quarter. We saw the tightening that I was anticipating in the Middle East a bit earlier, and that's reflected in the fourth quarter numbers. I anticipate Europe-Mediterranean region to be softer in the first quarter and stronger in the second quarter. and I anticipate the Americas region to be consistent throughout the first half of 2020 with what we saw in the fourth quarter. Time Warner has the industry's strongest balance sheet and we are dedicated to keeping it. Doing so requires us to develop a business that is free cash flow positive, which we achieved in the fourth quarter, and it requires that any potential consolidation be done patiently on a stock-per-stock basis and that the stocks are appropriately relatively valued. We completed a bond consensus in the fourth quarter related to the $350 million 2022 bonds that resulted in the loosening of certain operational restrictions and financial covenants as well. As a result of the consent, we are extremely comfortable with these financial covenants as we go through to maturity. We tendered and repurchased $125 million in base value of the bonds, so the outstanding base value today is just under $225 million. Repurchase improved overall cash flow by $8 million on an annual basis as a result of reducing negative interest carry. As I mentioned previously, we have no intention of altering our low net debt position and will continue to seek and value and create opportunities to repurchase our debt on the open market. We see no concern with refunding the debt upon maturity, and over the next year we will develop additional liquidity sources such as a revolving credit facility to ensure the company has backup liquidity to its cash on hand. We closed the quarter with $224 million of cash. We have $289 million of debt, the bulk of which matures three years from now in August 2022. But we are easily able to service the debt and can readily refinance the debt given our cash on hand. Also, we have no required capex and we have no vessels under construction. Importantly, our path to improving free cash flow isn't predicated on recovery in the drilling market or further recovery in the offshore vessel market. It's based on designing our shore-based infrastructure to be as It's based on focusing our vessels in the fewest regions possible while driving the highest margin on those vessels. It's about tightly managing required investment in those vessels. It's about rationalizing the fleet and layout. And last, but certainly not least, it's about keeping the net debt low and keeping working capital investment consistent with activity levels. These are the things that will ensure Tidewater is the highest return on capital global offshore vessel company in the world. Finally, I want to mention the current potential impacts that the coronavirus outbreak has on our business. We have been proactively engaged with international health and travel consultants on the outbreak. We have obtained and relayed advice and precautions to help our employees avoid any potential exposure. We continue to monitor the updates on this outbreak. Due to the nature of our business, the safety and well-being of our employees has always been our highest priority, and we have well-established protocols on safety communications. Our current concern is having our crews transit through high-risk locations. We continue to monitor countries identified as high-risk, and we have instructed our travel companies to avoid any crew movements through these high-risk countries. And with that, I would like to open up the call for questions.