Tidewater Inc.

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. Later, we will conduct a question and answer session during which you can dial star one if you have a question. Please note this conference is being recorded and I will now turn it over to you, 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 31st, 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 the 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. We will 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 10Q 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'll turn the call over to Quintin.

Thank you, Jason. Good morning, everyone, and welcome to the first quarter 2020 Tidewater earnings conference call. Allow me to start off by addressing the ongoing COVID-19 pandemic and Tidewater's response at both the employee and operational level. I'll then discuss some of the macro observations we're seeing as a result of the pandemic before sharing our latest outlook for 2020, our consolidated quarterly results, and then reviewing our operating segments in more detail. Last we spoke on our fourth quarter 2019 call, I emphasized the safety and well-being of our employees has always been our highest priority and noted that due to the nature of our business, we have well-established protocols on safety and emergency communications. As the pandemic circumstances have progressed to the current state, I'm proud to share that the entire team at Tidewater has demonstrated both the utmost professionalism and dedication to the task at hand, both aboard our fleet and those office employees sheltered on shore. Social distancing, remote working, and the rollout of new health and safety protocols have become the norm as we collectively strive to ensure every one of our employees and their families and the clients and customers they engage with remain healthy. I thank everyone for their efforts in working together to do their part to eliminate further transmission of the virus. Beyond our employees, we have experienced a number of direct operational impacts from the pandemic. Travel restrictions, both internationally and at home, have made crew changes, where even allowed at all, much more challenging. We've seen an increase in temporary accommodation costs due to the requirement for crews to be quarantined for typically 14 days when embarking and disembarking vessels. As the global logistics infrastructure fuels the strain of a displaced workforce, our ability to access technicians and parts to support dry dockings has also been severely limited. As we look to the wider market impact, it's helpful to set up the backdrop of the OSB industry, and we've spoken about this in the past. It's hard to find an industry that has more structural challenges than the OSB industry. Its customers are more consolidated. Its suppliers are more consolidated. It's got no real barriers to entry and even has a perverse barrier to exit. No real substitute market for the vessels, a substantial degree of operating leverage. It's capital intensive, sharply cyclical, and it's fragmented into several hundred owners around the world. So for those of you who are still on the call, that doesn't mean a well-managed OSV company can't generate pre-cash flow, even in the current market environment. And the good news is, at Tidewater, we're still planning and expecting to generate pre-cash flow in 2020. A big part of the call today will involve walking through our path to free cash flow generation in 2020 and beyond, even given the sudden change in outlook for the industry. Before I lay out the Tidewater response to the decrease in activity, I want to expand on the backdrop I just referred to because it provides the reasoning for the steps we are taking here at Tidewater. The SURE's path to not being able to generate free cash flow is not adjusting the capital invested and the SURE-based footprint to the current state of the market. Fleet size does not determine your ability to generate free cash flow. 150 vessel company, 100 vessel company, and a 10 vessel company can all generate free cash flow. But to accomplish this, the smaller your fleet, the higher your average specification needs to be relative to the global active fleet. You can make money with a high spec 10 vessel fleet if you keep your shore base costs in line and you don't try and carry idle capacity. The higher specification boats will work and they'll generate sufficient margins Higher specification boats don't always get a higher day rate, but they get more work. They don't get price, but they get volume. And the operating cost is the same. You're simply increasing your active utilization. It's the same with a 100 or 150 vessel fleet. As you get larger, the need to be much higher in spec decreases. You can make it up in fleet count. But you can't carry idle shore base capacity or idle vessels. You can lose money quickly holding on to the belief that cash flow drain associated with keeping an idle fleet and shore base personnel through these periods is an investment that will pay off. But vessel owners believe this because it has worked in the past. The oil field is accustomed to downturns that revert back to a long-term growth trend line. That is not what is happening today. The industry is shrinking, and that's okay. But investing like it's not shrinking, as demonstrated by keeping fleet and shore base constant, is the path to the poorhouse. Debt holders are the true equity holders in many vessel companies, and they need to make the tough decisions that named equity holders have been unwilling to make. The process of shrinking requires making decisions on the fleet to keep, the people to keep, the customers to keep, and the geographic spread. Determining the fleet to keep is fairly easy. Modern large fuel-efficient tonnage with the regionally required bells and whistles is second nature to most operators. Determining the people to keep is about looking for those hardworking, ingenious, multi-hat wearing, resourceful individuals who aren't afraid of change. The tough part is this industry is actually full of this type of individual. That is what makes ranking hard for many companies. Determining the customers to keep is based on who treats you best. When you're in a structurally weak subsector, as I outlined above, you work with those customers who don't abuse the natural power that exists in these situations. These customers are out there, and it's times like this that reinforce who to work with and who to avoid. Determining the geographies to focus on is based on the equipment and customers you decide on, predicated generally on where you are currently, but trying to be everywhere is the key to failure. Leveraging a scalable shore base is key to maximizing margins Technology is the key to scalability. The best outcome for the industry is to quickly get to a smaller set of super regional consolidators that dominate a particular geography and who leverage off of a small shore-based footprint. Historically, Tidewater has been the player that has a large average fleet that was everywhere geographically and focused on utilization. It's a strategy that made money in a market that was always reverting to an upward sloping mean trend line in demand. I'm not saying it earned its cost of capital, but it was a strategy that didn't lose money. Over the past 18 months, Tidal Water has been moving to a scalable and more focused infrastructure. Over that time period, you have heard us talking about leveraging technology and reshaping the geographic focus but it's a cultural change process as well as a change in business strategy and a change in management process. Shrinking involves factors that increase the cash spurt in the short run. Some factors that generate cash in the short run and done right, will set you up to be free cash flow positive in the long run. Shrinking involves severance costs for personnel, the cost of shuttering offices, and the cost of demobilizing vessels, an inherently inefficient process as fully crude vessels without revenue or burning fuel, but there are offsetting benefits such as the working capital liquidation, proceeds from asset disposals, and a temporary benefit from delaying dry docks. As mentioned in the backdrop, the OSB industry has its challenges. but it has a base load of non-drilling related work that keeps a substantial number of boats working. The vessel industry isn't going away, but companies must demonstrate flexibility in their operations to meet the changing demand of the market or they will go away. It's a fool's errand to try and predict where vessel demand will stabilize while the market is in turmoil, but it's necessary to make some preliminary assessments and, well, I've been on this errand for the past six years, so why stop now, right? We anticipate global vessel activity to be down 20% to 25% over the next year. That's another 400 to 500 vessels in excess of demand. Rough estimates. Chasing that number to perfection is another fool's errand, but that's the order of magnitude we're seeing. And you may recall from our previous calls, many of these vessels just went through their dry docking, so they will fight to compete with other vessels working in the market. This leads to a quick pullback in prevailing day rains. What makes the current circumstances even more problematic than the previous unpleasantness that began in 2014 is that there are very few non-cancelable contracts this time and no non-cancelable contracts at high day rates. The last pullback was buffered by some five-year non-cancelable contracts that were cut in the summer of 2014 when rates were at their peak. You may recall that we had a handful of such contracts that just rolled off last year. But there is no protective buffer. There is no cofferdam, as we would say, this time. So we've got to lighten the ship. That's the only way we're going to sail through this storm. You can't sail through the storm dragging a fleet of anchors. During these times, you toss stuff overboard that perhaps you wish you didn't have to toss. My objective is that by this time next year, we're down to a shot coat of primer. The vessels in the later fleet that were targeted for recycling are on their way to the scrapyard. The marginal specification vessels that we were trying to sell into secondary markets, they're going to scrap. There is, quite frankly, not enough economical layup capacity in the world to put all these vessels in layup. Those yards are still full. Paying premium prices for layup capacity while deteriorating vessels are in less expensive, more equipped locations, that doesn't make sense. Someone will do it, but not us. We will be getting even more aggressive in high grading the fleet through scrapping than we have been in the past, and we're already more aggressive than anyone else out there. This goes back to what I was discussing earlier. Get the fleet average specification up and stop carrying idle vessels. This is done by scrapping and divesting lower specification tonnage. Prices for scrap steel are also going lower as the world doesn't need much steel today. But holding out for higher scrap prices is another mistake ship owners make. You end up paying more layup costs and you gain higher scrap prices. So it's a race to the recycling yard to lower the cost of layup and provide some cash from the idle steel. We anticipate generating $39 million of cash from vessel disposals in 2020. We generated $10.5 million in the first quarter. We still anticipate generating $39 million of cash in 2020 from vessel disposals, but more vessels will likely be sold to reach that amount. You will notice that we wrote down the value of the available for sale fleet by $10 million in the first quarter to reflect this new reality. And as we go through the second quarter, we will be making the determination of which vessels would move into the asset held for sale category. On our fourth quarter 2019 call, we announced backlog of $440 million for work in 2020. Since that time, the effects of the demand reduction and oil price driven capex reductions has resulted in approximately $63 million in reduced backlog from early contract terminations and $8 billion in reduced backlog from delays of getting vessels back on hire because the vessels are in shipyards that are shut down to virus containment related delays. So summed up and deducting the first quarter revenue of $116 million, that leaves backlog for the remainder of 2020 at $253 million. Our primary backlog risk comes from most vessels doing drilling support work. As stated previously, production support is expected to remain relatively stable, although shut-ins of offshore production platforms may cause additional cancellations should the oversupply of oil worsen. The vessel spot market has all but disappeared for the year, so we anticipate a significantly smaller part of our revenue for the remainder of 2020 will come from this market than we would typically see. All told, we anticipate a revenue loss of approximately $100 million in 2020, $63 million in cancellations, $8 million in dry dock delays that slip into 2021, and the elimination of $29 million of spot market work. With that revenue loss is approximately $45 million of operating profit. In addition, we are looking at approximately $13 million of costs associated with deactivating those vessels coming off hire and additional layup costs. On the frictional cost side, that is the cost associated with shrinking the shore base and the pandemic driven inefficiencies, we are estimating those costs to be $7 million for the remainder of 2020. That's $65 million less in cash than we anticipated at the beginning of the year. Offsetting that, we will be spending $20 million less in dry docks, and I anticipate approximately $30 million in additional working capital liquidation. Accordingly, we see the net impact on 2020 as a decrease in free cash flow of $15 million. At a very summary level, for the full year 2020, we are anticipating revenue of approximately $395 million. with $116 million recognized in the first quarter, $253 million in backlog, and $36 million anticipated to be booked based on options in existing contracts. The revenue is at a gross margin of 35%, so $138 million from core operations. Take from that the $13 million of frictional costs of vessels going into the layup and the $7 million of pandemic inefficiencies, and you're down to $118 million. Take $81 million off for general and administrative expenses and you're down to $37 million. Dry docks at $33 million gets you down to $4 million. Then we have the proceeds from asset disposals of $40 million, working capital liquidation of $30 million, and taxes and other of a negative $9 million. All summed up, that's $65 million in free cash flow. Very high level, and it's down from the $80 million we anticipated as of the beginning of the year. We also have $18 million of net interest expense and $10 million of principal payments, for those of you who think you should include those numbers in determining free cash flow. Heathens. So what do we have to do different to meet these estimates? We have to stop doing dry docks. We have to quickly lay up and decrew idle vessels. We have to collect what is due from us from large multinationals and national oil companies. And we have to sell vessels. All achievable. Of course there are risks to these estimates, so let me walk you through what I see as the bigger risk. As you may expect, our customers are requesting rate reductions where possible, which is the same process we went through during the previous downturn. This time there is very little movement to make, if any. Our customers appear to understand that these cost savings cannot come from their supply chain this time, but downward pressure on prices continues regardless. We have factored all of this into our $100 million estimated decrease in 2020 revenue, along with the absence of any real spot market and vessel cancellations. Operational expenses are slightly higher due to the previously mentioned logistical challenge we have had to make associated with the quarantine periods for mariners. When vessels complete contracts and come off hire, we are moving swiftly as possible to lay up the vessel and de-crew, minimizing any ongoing costs in the absence of revenue generation. We believe we have a good understanding of these costs today, but within the global shipping industry, not just the OSV industry, there are approximately 150,000 mariners around the world who are awaiting a crew change. And on that note, I believe the International Chamber of Shipping is doing an excellent job working with authorities on this issue. There may be other costs that we do not anticipate, but we have factored in $20 million of additional correctional costs, and we are comfortable with this estimate based on everything we know today. Stopping dry dock activity is a typical lever shipping company's pull during times like these. In the OSV industry, we all did this in the 2015 to 2017 time period, and as we have discussed on previous calls, that resulted in an enormous wave of dry docks and deferred maintenance from 2018 until now. The build cycle amplified this, but here we are again. We can delay dry docks, and we will, but we can't stop dry docks. We will look to catch up in later years, but the savings in 2020 are achievable. We spent $25 million of our $53 million 2020 dry dock budget in the first quarter, which was all according to plan. The brakes are on all dry dock spend now, but it's a bit like the brakes on a boat. It doesn't stop as quickly as you would expect from a road vehicle. We've got vessels and yards that are in pieces. That is, the boats are in pieces literally, and the yards are in pieces figuratively, as they can't get people or technicians on location to complete the work due to virus-related travel restrictions. We anticipate another $8 million of dry dock costs in the second quarter as this work comes to an end, and no dry dock spend in the third and fourth quarters. Accordingly, we anticipate a $20 million savings in 2020 from the deferral of dry dock spending, and again, we feel comfortable with this estimate. We have been building working capital over the past six months, and I anticipate that we will significantly liquidate this balance as we go through the remainder of 2020. The substantial majority of our accounts receivables and of our long-dated accounts receivables are with super majors and national oil companies. It's frustrating when industries with the wherewithal to pay do not pay timely, but we're currently not concerned about the collectability of the outstanding balance, and we feel comfortable in our estimation of achieving $30 million of liquidation in 2020. Part of the liquidation is correcting for the build over the past six months, and the remainder will be the natural decrease that comes from a decrease in activity. We have $39 million forecasted for proceeds from vessels' disposals. We sold nine vessels for $9.5 million in the first quarter. We received another $1 million in deposits for vessels under contract to be sold. Year-to-date, we have $20 million sold or under contract to be sold. We may end up selling more vessels in 2020 than we originally envisioned as we shrink and high-rate the fleet even further, but we still feel comfortable with the $39 million estimate for 2020. The generation of free cash flow remains our key focus and is the key determinant in our cash incentive program. As we look out further to 2021, we need to lighten the ship. We won't have the working capital liquidation benefit in 2021, and we will have to resume some level of dry dock activity. In addition to the three actions I just noted as key to 2020 free cash flow generation, we must focus and concentrate the shore base footprint, the fleet mix, and the customer base. I'll now move on to the results for the quarter. As we mentioned in the press release, each of our four regions had higher average day rates, lower overall operating costs, and higher operating margins as compared to the previous quarter. This was achieved with our lowest G&A cost level ever, a normalized $20 million per quarter, or $81 million annually. In the first quarter of 2020, Tidewater generated a revenue of $116 million, a 5% or 6 million decrease from the same period in the prior year. This was largely driven by operating an average of 15 fewer active vessels, a result of the previous plan on reducing, refocusing, and as a result, high grading the tidewater fleet. With the current pullback, this will accelerate. As a result of delays in getting vessels on hire in mid-March as the pandemic intensified, active vessel utilization decreased to 79% in the first quarter, down from 81% in the prior quarter. Our general and administrative expense of $21.4 million included $1 million related to the impairment of a receivable in Nigeria from a small intermediary. But even including this non-cash item, we had a 21% decrease year over year resulting from decreased headcount and lower stock compensation costs. The result is a normalized run rate of $81 million a year, which is down $64 million from the merger pro forma run rate of $145 million. Net cash flows used by operating activities for the quarters was $27.5 million and free cash flow was negative $15.2 million. The negative cash flow numbers for the quarter were due to the planned dry dock spend of $25 million and the build-in working capital, which incidentally wasn't planned, but which we anticipate to reverse over the remainder of the year. Obviously, our first quarter dry dock program was done to prepare the business for what we believe would be a better market with improving demand and increasing day rates, which we did begin to see in the first quarter. As I mentioned previously, we have a few vessels stuck in dry docks around the world that we will be completing in the second quarter. Looking onto our results, at a more regional level, our America segment saw vessel revenues decrease 10%, or 3.4 million, during the quarter ended March 31st, 2020, as compared to the quarter ended March 31st, 2019. This decrease is primarily the result of four or fewer active vessels and the reduction in active utilization from 87% to 86%. However, average day rates increased by 4%, partially offsetting these declines. Vessel operating loss for the America segment for the quarter ended March 31, 2020 was $1.2 million, which was $100,000 more than the operating loss for the year-ago quarter. The decrease in revenue was nearly offset by the decrease in operating costs. In the Middle East, Asia Pacific, revenue increased 21%, or $4.4 million, during the quarter ended March 31, 2020, as compared to the quarter ended March 31, 2019. Active utilization for the most recent quarter increased from 76% to 78%. Average day rates increased 9%, and average vessels in the segment increased by four. The Middle East Asia Pacific segment reported an operating loss of 900,000 for the quarter ended March 31st, compared to an operating loss of 1.2 million for the year-ago quarter. Activity remains high with Saudi Aramco continuing to increase its demand for vessels in a region where availability is tight, as is crew access, due to virus-related travel restrictions. For Europe and Mediterranean, our vessel revenues increased 3% or $900,000 during the quarter ended March 31, 2020 as compared to the year-ago quarter. Average day rates for the same period increased 14% because of increasing demand for vessels in the region. Active utilization also increased 3 percentage points during the quarter compared to the year-ago quarter. The vessel fleet decreased by four active vessels, which partially offsets these improvements. The segment reported an operating profit of $1.5 million for the For the North Sea in particular, we saw the spot market largely evaporate in the past 45 days, with drilling cancellations and a flood of more than 30 PSVs going idle, which is lowering the day rate of the occasional spot market hire. Vessels without a high probability of moving on to additional work are being put in layups. We have laid up two vessels recently and are likely to send more to lay up if the spot market continues to remain weak in the typically strong summer season. In West Africa, where vessel revenues decreased 27% or $9.6 million during the quarter ended March 31, 2020, as compared to the quarter ended March 31, 2019, The West Africa average fleet decreased by 10 vessels during the comparative periods. Active utilization for the segment decreased from 77% during the first quarter of 2019 to 68% during the first quarter of 2020. Vessel operating profit decreased to an operating loss of 4.9 million for the quarter, primarily due to a decrease in active vessels, coupled with higher operating costs from higher than anticipated downturns. Despite the expectations for an improving quarter, with dry docks wrapping up in the regions, We were impacted by the untimely combination of virus-related challenges and the oil price collapse. And so while it's difficult to see past today's turmoil, there is a likelihood of a steep recovery in the future. It's not reverting to an upward-sloping demand trend line. It's a downward-sloping one, but it's still reverting upwards from here. And on that note, Brandon, let's open it up for questions, please.