Tidewater Inc.

for the three-month ending September 30th, 2021. 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 may dial star 1 if you have a question. Please note this conference is being recorded. I will now turn the call over to Wes Gocher, 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 three months ended September 30th, 2021. I'm joined on this call this morning by our President and CEO, Quentin Neen, 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 Quinton.

Thank you, Wes. Good morning, everyone, and welcome to the third quarter 2021 Tidewater Earnings Conference call. Joining me in presenting our prepared remarks, as usual, are Pierce Middleton and Sam Rubio. I will open the call with some general commentary on the quarter. Pierce will cover the markets and 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 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 the 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 to response to strengthening demand and reiterate our view that all stacked 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 rates, 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 pre-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 costs increases. I mention 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 is, 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 a 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 vessel class is eminently 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 creative 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, growth, and we're 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 rate 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 five-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 two tugboats. The total capital cost for these two new vessels is $12 million. We price 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 five-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 assets sale proceeds and we spent about 11 million on dry dock expense during the third quarter about 4 million of this dry dock spend was attributable to vessel reactivation. 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. 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 one asset held for sale, added two to this category, and moved one back to the active fleet, leaving our vessels held for sale unchanged from vessels in the second quarter. Vessels and 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 and layup. As I mentioned last quarter, we reduced the annualized run rate of vessels and 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 cut the run rate by 50% so far during the year. It's a combination of reactivating vessels, disposing of vessels, and reducing the cost per day of the vessels and 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 laidup fleet makes up the remainder to get to the overall reduction of 27%. We now anticipate dry ducts 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 the 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... 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 its 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 and the various geographies in which we operate.