This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: During the Q&A session, if you have a question, please press star 1 on your touchtone phone. Please note this conference is being recorded, and I will now turn it over to Jason Stanley, Vice President, ESG and Investor Relations. You may go ahead, sir.
spk01: Thank you, Brandon. Good morning, everyone, and welcome to Tidewater's earnings conference call for the three and 12 months ended December 31, 2020. I'm joined on the call this morning with our President and CEO, Quentin Neen, our Chief Accounting 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 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 make during today's conference call. Please refer to our most recent 10K for additional details on these factors. This document's available on our website at tdw.com or through the SEC at sec.gov. Information presented on the call today speaks only as of today, March 5th, 2021, and 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 Quinton.
spk02: Thank you, Jason. Good morning, everyone, and welcome to the fourth quarter 2020 Tidewater Earnings Conference call. I'm pleased to say that this has been another solid quarter for Tidewater. It's hard to overstate the challenges we faced in 2020, but the worst of the pandemic-driven downturn seems to be behind us. Revenue surprised us to the upside in the fourth quarter. On the last call, we guided to $385 million for the year or $81 million for the fourth quarter, and we came in at $397 million for the year or $92 million for the fourth quarter. Historically, and many of you already know this, the fourth quarter is normally a tick down from the third quarter. It's due to weather in the North Sea, but also due to calendar year budget exhaustion. Incidentally, the first quarter is the weakest calendar quarter, likewise due to weather in the North Sea, but in addition to that, some clients tend to charter on a calendar year basis at the beginning of the year, so you get a bit of charter hire gap in the first of the year. So the revenue surprise in the fourth quarter also resulted in the fourth quarter revenue being higher than the third quarter revenue, which is why I say it seems that the worst of the pandemic downturn is behind us. Also noteworthy in the fourth quarter was the incremental gross margins on the excess revenue. Revenue was up $11 million from guidance, and gross margin was up $10 million. That's a 90% incremental gross margin, which demonstrates the extremely high operating leverage of our business. In this case, it's driven by higher than anticipated day rates and improved active utilization. Our G&A costs continue to come down. That's now eight consecutive quarters of G&A run rate cost reductions. Our annualized G&A expense for the fourth quarter was $68 million. Just a reminder, the combined 2014 G&A for Tidewater and Gulfmark standalone was $253 million. We've been beating on G&A since the 2018 merger, and we're not going to take our eyes off this ball, but in a moment, I'm going to bring out some other elements of the business that we are more focused on in 2021. When we last spoke on the third quarter call, I walked you through our free cash flow guidance for the full year 2020, and I indicated free cash flow for the year would be $62 million. We came in at $53 million, even though our operational performance was noticeably better than what we guided. The reason, as many of you may have already jumped to, is that more cash got hung up in working capital than we hoped. I hinted to this on the last call, but a good customer of ours in Mexico has not been paying timely. Our balance with PMAX is approximately $18 million higher than ideal. I'm not worried about the ultimate collectability of the accounts due, but it is annoying, and it did throw us off our free cash flow generation goal for 2020. Our dialogue with them is open and constant, and based on that dialogue, we remain optimistic that we will get this balance normalized over the next five months. We did receive a $5 million payment for them about 10 days ago. Last quarter, we completed another bond consent and tender. We repurchased $50 million of bonds at 100.5% of par and eliminated the EBITDA covenant Q2 through to 2022, and we also loosened up the covenant definitions. I have absolutely no concerns about our financial covenants. We continue to evaluate the best options in the bank and debt capital markets with regards to refinancing the bond maturity in 2022, but we already have more cash today than the bond maturity balance, and we fully intend to continue to be free cash flow positive. I'm not worried about the covenants, and I'm not worried about the maturity. Before I turn it over to Pierce to cover our consolidated quarterly results, I'd first like to point out two ongoing transformations at Tidewater. We mentioned in the press release last night, and it was also covered in a press release by one of our vendors in Marsat, but I wanted to give you some more color on what's been going on behind the scenes here at Tidewater so you can better understand how our shore-based operating platform has become so scalable, so stable, and extremely cost efficient. and also how good this team is at transforming business processes. In the first 18 months after the 2018 merger, we had 12 different functional organizations that went through a complete overhaul. We now have a common ERP system throughout our organization, but more importantly, the global processes are all the same, and the process is paperless. It doesn't matter if you're in Dubai or Aberdeen or New Orleans. It's all the same. When all the processes are the same across your global organization and the process is paperless, you have maximum scalability and you have maximum redundancy. You can literally do everything from anywhere. That's what allows you to safely reduce shore-based expenses, and it's what's allowing you to add additional vessels without adding headcount. This team has created a digital enterprise in the shipping space. During the pandemic, we continued our technological push by connecting our digital enterprise to the vessels. At the time of the merger, 70% of the vessels lacked advanced BSAT technology. Our alliance with Inmarsat helped us change that. This last mile connectivity was challenging in the physical logistical sense. You've got to roll it out to the vessels, and by the end of 2020, we got there. Now we have a global shipping enterprise with standardized, consistent global practices, and we have an IT backbone connecting all of the vessels. This allows the IoT, the Internet of Things. This is where it really gets exciting. We can begin leveraging the localized technology on the vessels and getting real-time data monitoring, and we learn from canvassing the data of the global fleet, the so-called big data benefit. We benefit from global efficiency, but our customers benefit as well. Together, we can use the data to better manage carbon emissions, for example, but moreover, across the board, improvements in operating efficiency. We're beginning to raise the bar, and by doing so, reducing the commoditization of our service offering. The other transformation we are embracing is working with our customers to lower the carbon emissions from our vessels. Many of you may find it surprising to know that the OSV industry has been working on improving its fuel operating efficiency and consequently reducing its carbon impact for our vessels for quite a long time. Quite frankly, for us, it's been motivated largely by the self-interest of becoming the low-cost provider. As you may recall, fuel is provided by our customers, and therefore fuel efficiency is a key component in their vessel selection process. But it has also been motivated by customers in areas such as Norway, which have been focused on carbon, noxious, and noise emissions since the early 2000s. Our fleet has been operating on very low or ultra-low sulfur fuel for much of the past decade, well ahead of the IMO 2020 regulation making this a requirement. Particularly for tidewater, during our last new build program, our fleet became one of the largest in the world to integrate the Siemens Blue Drive Intelligent Propulsion Management System, resulting in a significant reduction in fuel usage and greenhouse gas emissions, while at the same time cutting maintenance costs. By investing in this technology, these vessels were also prepared for the future upgrades to utilize alternative energy sources such as battery power. To date, several of our vessels have been converted to utilize hybrid propulsion, including the ability to operate on shore power when in port, all paid for by the customer through upfront lump sum payments or separately negotiated day rate increases. I'm pleased to report that these upgrades, completed in partnership with our customers, have proven quite successful in reducing emissions, Throughout 2020, these technologies achieved emissions reductions of approximately 18% overall and over 60% while in port. We are continuing to adjust our operations to take full advantage of this technology and we expect that we will see even better results over time. We've talked about the integration of batteries as a hybrid power source, but I want to be clear that this does not mean that we feel this is the only long-term or perhaps even the best long-term solution available. Our team is constantly evaluating other potential and emerging fuel options and enhancing technologies that can further improve the operational efficiency and the performance of our vessels. To achieve these emission reduction goals, these upgrades require material capital investments. And while we are one of the few OSD companies with the financial strength to undertake these investments, we resist doing so without our customers also demonstrating their commitment by paying up front for these conversions or paying higher day rates for this technology. As part of our broader mission of offering high-quality, profitable services to our customers, while at the same time setting ourselves on a lower emissions path, we continue to hydrate our fleet through disposing of vessels that don't align with these goals and evaluating assets for acquisition that would further this mission. I'm excited about these two transformations, and I look forward to keeping you updated on our progress. Now, after the pandemic broke on the first quarter call last year, I began to give you some very granular guidance on how I saw the business rolling through the turmoil. And my objective was to get you comfortable that we would remain pre-cash flow positive through that difficult period and talk with you more in depth about where those cash flows were coming from and why. For 2021, allow me to step back again and be more general. For 2021, I see it unfolding a bit like a reversal of the past 12 months. I spoke earlier in the call that I was pleasantly surprised not only that the fourth quarter was better than we guided, but that it was better than the third quarter. I see tendering activity in the second half of 2021 as quite robust. Tendering activity doesn't equate to demand, but it is a good indication that supply and demand will be tightening up over the next 12 months. Generally, I see us getting back to where we were in the first quarter of 2020 by the first quarter of 22. Last year, I broke out for you the inefficiencies of the pandemic, essentially trying to capture the cost of the pandemic. We still have those efficiencies today due to pandemic protocols and restrictions, but it's become more a part of our routine. For reference, these inefficiencies cost us approximately 5% of revenue. But all in for 2021, I'm anticipating gross margin percentages of approximately 30%. We anticipate G&A to be right at the $70 million mark for the year. Dry dock, we anticipate to be approximately $20 million for the year. On top of that, we anticipate $8 million of miscellaneous capital expenditures for vessel upgrades such as hybrid batteries and then some more IT development. We have $34 million on the balance sheet in our assets held for sale category, which we intend to dispose of during the year, but of course it all depends on market conditions. And then I'm anticipating a bit of correction in working capital, as I mentioned earlier in the call. The improvement is not going to be linear, and I do anticipate that it will be weighted to the second half of the year. And with that, let me turn the call over to Piers for an overview of the company's performance by region.
spk00: Thank you, Quinton, and good morning, everybody. Before I talk about each of the regions, I just want to make a couple of observations about 2020 and what we hope will happen in 2021. Firstly, it goes without saying that 2020 was an extremely tough year. We saw an unprecedented drop in demand for our services. But as our results showed, our teams around the world still managed to deliver value in very trying circumstances, not just by winning work, but being disciplined in how we won that work. Those vessel owners that took work that did not cover their debts are, in our view, accepting a fate that is equivalent to death by 1,000 paper cuts and will just continue to extend out any hope of a market recovery. Whilst we are cautiously more optimistic for the outlook in 2021 and beyond, and frankly, it couldn't be much worse, this is still a very fragmented and challenged industry with too many players hanging on by their fingernails. And even if we start to see some incremental improvement in rates and utilization, we do not expect it to be the panacea that some are hoping for to heal their terminal balance sheets. We believe, of course, that we're closer to that panacea than most. As we've commented on in previous earnings calls during 2020, our West Africa and Europe and Mediterranean fleets face the strongest headwinds throughout the year. But still, on a global basis, active utilization across the whole fleet was only down 4%, 77%, compared to the fourth quarter of 2019. And for the deep water fleet specifically, we actually saw a 5% increase in utilization, which was reflected in our average day rates across the fleet being up approximately 8% to $10,750 compared to the last quarter of 2019. Globally, we had 32 fewer average active vessels working in the fourth quarter of 2020 than in the fourth quarter of 2019, but we had 12 more vessels active compared to the third quarter in 2020. And for the first time in 12 months, our average stack fleet in the fourth quarter was below 60 vessels. Confirmation that our strategic commitment to careful management of the stacked versus active fleet, targeted vessel disposals, flight to quality, and commercial discipline is continuing to drive value for all our stakeholders. Our Middle East, Asia Pacific region continues to see solid demand relative to the rest of the world, with total utilization and average day rates both up from the fourth quarter 2019. The active fleet decreased by one vessel from the previous quarter, Our average rates in the region were $9,002 per day compared to $7,746 per day in Q4 2019. Vessel revenue for the quarter was down $1.6 million compared to Q4 2019, contributing to the area's operating loss for the year of $5.9 million compared to a loss of $6 million for 2019. We have started to see a pickup in inquiry levels for the region since the start of the year, and subject to additional COVID-related delays, we expect to see some of that inquiry starting to turn into firm contracts going into Q2 and Q3 of this year. To West Africa, where the region struggled throughout 2020. Vessel revenues decreased by $12.4 million during the quarter compared to the previous quarter, with a year-end vessel operating loss of $27.5 million compared to an operating profit of $8.3 million in 2019. The total fleet in the region was down five active vessels compared to Q4 2019, as we purchased 11 crew boats in the fourth quarter, and the stack fleet was down 15 vessels from Q3 2020, as we either recycled, sold, or started to reactivate a few vessels during Q4 2020. Average day rates for the region were $8,510, a decrease of 6% from where we were this time last year. West Africa has been the hardest hit of all regions, but also could offer the most upside for companies like us with experience and vessels in the region towards the latter half of this year and going into 2022. In the Europe and Mediterranean region, our vessel average rates slightly improved from $12,171 in Q4 2019 to $12,368 per day in Q4 2020. However, vessel revenues for the year decreased 32% or $40.1 million compared to 2019. The lower revenue during the course of the year was driven by having 15 fewer active vessels in the region, which was caused by a drop in demand related to the pandemic. Utilization for the active fleet for the quarter improved over 90% compared to 86% for the same quarter last year. Whilst the winter months are historically quieter for the European market, we did see some stronger activity in the Norwegian sector in Q4, which has driven a tighter spot market into Q1 of this year in the North Sea area. As hopeful, we've also been re-awarded some work in the Mediterranean region, which had been delayed from early 2020 and allowing us to reactivate two of our vessels from the stacked fleet. We hope that this is further confirmation of better times ahead for the region. Leaving the best until last, the Americas region delivered a strong fourth quarter that included an operating profit of $1.5 million and vessel operating profit for the year of $5 million, compared to an operating loss of $805,000 for 2019, despite seven fewer active vessels and lower revenue of $1.3 million compared to the same prior year period. Utilization for the region was 86%, slightly up from the same period in 2019 of 85%. The region still faces challenges in 2021, but we've had some recent successes in Suriname and the Caribbean, which give us some cause for optimism of further work to come, as well as seeing an increased level of inquiry from the IOCs in Mexico that should bolster activity in the region through the second half of the year. Thank you, and back over to Quinton.
spk02: Thank you, Piers. Our objective, as we've stated many times before, is to generate more cash by operating fewer vessels at higher day rates and to operate them at a lower operating cost per vessel and at a lower G&A cost per vessel. We're doing this while carefully minding the capital expenditure and working capital investments. These objectives are simply stated, but achieving them requires innovative technology, agile change management, and strong financial disciplines. The company is free cash flow positive, and our objectives and compensation plans are all geared to keeping it going that way. And with that, Brandon, we will open it up for questions.
spk03: Thank you, and we'll now begin the question and answer session. If you have a question, please press star 1 on your phone keypad. If you'd like to be removed from the queue, please dial the pound sign or the hash key. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please press star 1 on your phone keypad. And from Barrett, we have Patrick Fitzgerald. Please go ahead.
spk04: Patrick Fitzgerald Hi, guys. What did you give in terms of gross margin guidance?
spk02: Patrick Fitzgerald Hey, Patrick, how are you? Thirty percent.
spk04: Patrick Fitzgerald Okay. And you're not giving any revenue guidance, right?
spk02: Well, I would encourage you to see 21 as a reversal of 20. So my expectation is that we're going to be just about level with where we were at last year. But as Piers indicated and as I had some comments on, I'm a little bullish on the second half of the year.
spk04: Right. Okay. So, you know, kind of a broader question. Day rates, obviously, you know, is a nice better fourth quarter than, than you expected initially. Obviously the price of oil here is significantly higher than it, than it was a few months ago. I mean, what, I guess what in big picture, what needs to happen to see a material increase in, in day rates?
spk02: So, you know, Of course, it's always down to supply and demand balance. What you've got now is the industry as a whole recovering from the pandemic. What happens in years like 2020, and we saw the same thing happen in 2015, is everybody pulls back on any type of maintenance that isn't just absolutely necessary. So it's not just that drilling activity pulls back, which a lot of people talk to and talk about, but it's that the maintenance level of activity pulls back substantially. And if you think about the demand equation for our business, right now it's running about 70% of the boat activity is related to just regular maintenance of ongoing platform production-oriented activities. And about 30% of it is drilling activity. to the extent that drilling comes back, that would certainly tighten up demand much faster, and therefore push day rates and push that supply and demand balance into something that is more in the boat owner's favor. But the two things that I'm really counting on as I look out to the rest of 20 and into 22 is not really a pickup and drilling activity, but a resurgence of the maintenance activity that has been delayed, and then just the continued attrition of vessels. We haven't built a vessel in this industry in over six years, everybody's been real thin in profit margins. The vessels haven't been reinvested in. So we're starting to see vessels drop out of the supply chain nicely. And I anticipate the attrition in supply and the resurgence in demand, mostly from maintenance activity, are what's going to put us in balance by call it the end of 21.
spk04: Right. Do you have, like, an effective utilization scenario
spk02: figure that you look at across the industry um you know where are we at um in in terms of that it was i'll tell you it's hard to tell because you know so many of the vessels that are on the rolls today so so many of the vessels that are in the you know the denominator of total vessels in the world are not really suitable for work okay i'm gonna give you some essence in a second let me tell you why i think a lot of the information out there is unreliable You know, there's a lot of vessels out there on the sidelines that have been idled since 2015. They haven't been maintained, and they're not really coming back to work, okay? So they're in the denominator of a lot of, you know, the vessel counts and ratios that you see in our industry. What I see today is utilization levels in that mid-70s range. So I'll call it 70 to 75%, okay? Now, the better companies in the better regions, like for ourselves, we can push that easily into the high 80s and low 90s. It all depends on your vessel class, but it also depends on your particular dominance in the various regions. That's what you look for. You look for ways in a vessel class or within a particular geographic region to get a bit more than the industry average. If your question is also leading to, okay, at what point do you really begin to get day rate increases? Like when can you push price? I'd tell you that's probably closer to the 85%. And it's not just 85% in the localized regions. It's 85% in the localized and adjacent regions because you always have the ability of other vessels to kind of saunder into your work area and keep rates down, you know.
spk04: Right, but it's ultimately an increase in demand for just the number of PSVs is what you're – okay. All right, thank you. Yep, yep.
spk03: Once again, if you do have a question, please dial star 1 in standing by for any further questions. Okay, it looks like no further questions at the moment. Quinton, we'll turn it back to you for closing remarks.
spk02: Thank you, Brandon. Thank you, everyone, and we will update you again in May. Goodbye.
spk03: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.
Disclaimer