Tidewater Inc.

Good morning, my name is Chantelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Q2 2022 Earnings Conference Call. As a reminder, today's conference call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. Wes Gocher, Vice President of Finance and Investor Relations, you may begin your conference.

Thank you, Chantel. Good morning, everyone, and welcome to Tidewater's earnings conference call for three and six months ended June 30th, 2022. I'm joined on the 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-K and 10-Q for additional details on these factors. These documents are available on our website at tdw.com or through the SEC at sec.gov. Information presented on this call speaks only as of today, August 5, 2022. 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 financial measures can be found on our website at tdw.com, as included in yesterday's press release. And now with that, I'll turn the call over to Clinton.

Thank you, Wes. Good morning, everyone, and welcome to the second quarter of 2022 Tidewater Earnings Conference Call. I'm pleased to say that the second quarter continued a pace of rapid improvement in the offshore vessel market and, more importantly... marked an inflection point in the market that we have been anticipating for some time now. We've talked about momentum building in the business. The second quarter marked the tipping point in vessel supply and demand dynamics, and it marked a significant step up in our operational and financial results. I'll provide more color on some of our regions and vessel classes, but in short, the most important indicator in the strength of our business, day rate, increased by nearly $1,900 per day sequentially. With 172 working vessels, that's a big move for one quarter. You may recall that we've discussed an increase over an entire year during a typical up cycle up about $1,500 per day. This sequential quarterly uplift is the most indicative signal as to the step change we're experiencing in the market today. During the second quarter, we closed on the acquisition of Swire Pacific Offshore, which you may hear us refer to as SPO. I'm pleased to say that the integration of the acquisition is going well, with some early successes realized, and that the SPO fleet contributed $43.2 million of revenue during the second quarter. Post-closing of the transaction, and that it generated vessel-level cash margins in line with our consolidated vessel-level cash margin of 38%. For the quarter, the Legacy SPO G&A total approximately 3.9 million, which would be 5.2 million on a full quarter run rate. Total G&A burden for Legacy SPO in 2021 was about 35 million. We are confident that we will achieve our targeted goal of 20 million in G&A synergies over the next nine months, and more broadly, we'll achieve total target synergies inclusive of both G&A and OPEC synergies of approximately 45 million over the next 12 months. I want to thank both the Legacy Expo employees and our Legacy Tidewater employees for all of the effort thus far in ensuring this acquisition and integration is a success. Turning back to the second quarter, revenue increased meaningfully in the second quarter, up 55% compared to this first quarter. Total revenue increased to $163.4 million in the second quarter compared to $105.7 million in the first quarter. And of course, that included the contribution from the acquired SPO vessels beginning in late April. Looking at this on a normalized basis, revenue per active vessel was up approximately 18% sequentially, while average day rate was up about 17% sequentially, with the increase in revenue almost fully attributed to the move in day rates. Vessel level cash margin expanded over four percentage points to 38.2%, nicely in excess of the 30% target we've talked about in recent quarters, and up nearly 11 percentage points from the second quarter of last year. Looking across the world at our various regions, we experience broad-based momentum in all of our operating regions. My intention is to stay with a per-vessel view of the business to eliminate any distortions from the absolute impact of the SPO acquisition, but Sam will give more detail on the absolute changes in his commentary. Our fleet in Europe Mediterranean led the way with a 30% sequential improvement in day rates, with significant improvements across the UK, Norway, and Egypt. The second quarter is usually one of the seasonally strong quarters in this segment, particularly in the North Sea, given the nicer weather in the spring and early summer. Bessel-level cash margin improved considerably during the quarter, up 14 percentage points sequentially to nearly 41%, and up nearly 20 percentage points since recent lows at the end of 2021. Utilizations flipped modestly sequentially, which is more a reflection on our decision to stay in the spot market rather than any weakness in the market itself. The spot market has more frictional unemployment, and you try to more than offset that with quicker day rate increases. We've opted to enter the spot market a bit more aggressively than in prior periods, given the relative strength of the market, which can be seen in the day rate achieved and the associated margin expansion. Additionally, we have one more vessel on average working during the quarter. West Africa continued to show strong momentum during the quarter. As you may recall, we essentially doubled the size of our OSV fleet in Africa via the SPO acquisition. Day rates improved 21% sequentially to about 10,700 per day, well in excess of anything we've seen in recent memory. Vessel level operating margin modestly improved to 42% sequentially as this region was the largest recipient of the new SPO vessels and their existing cost structures. Given the scale of operations from the legacy SPO fleet in West Africa, much of the OPEC synergy achievements we have targeted will ultimately accrue to this region and help support continued margin expansion. Average active utilization continued to move up nearly 4 percentage points to 83% in the second quarter. The legacy SPO fleet was consistently highly utilized, speaking to the quality of the vessels in that fleet, and we expect to continue to drive utilization and margin expansion with the expected OPEC synergies in the region. Turning to our Middle East region, I first want to point out that this segment has historically been titled Middle East and Asia Pacific and was inclusive of a limited number of vessels we had operating in Asia Pacific prior to the acquisition of SPO. Given the sizable presence in the acquisition brings to Tidewater in Asia Pacific, we made the decision to split the Middle East into its own segment and established Asia Pacific as a new distinct segment due to the relative scale of the two regional businesses, and to provide additional disclosure on the two sizable discrete markets. Turning to the quarter, perhaps one of the most interesting signals as it relates to global tightness in the supply vessel market is the price improvements we saw in the Middle East this quarter. Historically, the Middle East market has proven a consistent market in which to work a large number of low to medium specification vessels. but generally somewhat challenging to realize day rate increases given the relative oversupply of this specification of vessels. However, during the second quarter, average day rate improved by 16% to about 9,500 per day, a meaningfully higher day rate average compared to what we've seen in the past several years. Vessel cash margin approached 30%, up almost 4%, and well in excess of anything we've seen in recent memory. Turning to the Americas segment, average day rate improved about 7% sequentially, although there was some regional mix that obscures the improvements during the quarter and some of the more interesting markets within that segment. The Caribbean portion of the Americas continued to show significant momentum, with average day rate up about 25% sequentially. The average day rates in Mexico, which at times shares some similar characteristics with the Middle East market, in that it is a relatively small vessel market with a dominant state-owned customer, so a nearly double-digit percentage increase. The U.S. Gulf of Mexico was roughly flat due to the limited number of vessels we have in the area, while the average day rate improvement for the America segment was somewhat modest on a relative basis. The operating leverage inherent in all of our businesses began to manifest itself in this segment during the second quarter. Utilization improved by nearly 11 percentage points in addition to the day rate increase We increased revenue by about $9 million sequentially, $6.5 million of which dropped to vessel cash margin, which was up 9 percentage points sequentially to 43%, nearly double from the year-ago quarter. Lastly, I'd like to turn to our new Asia-Pacific segment. About 30% of the legacy SPO fleet was comprised of vessels in the Asia-Pacific geography, principally working in Southeast Asia and Australia. At the end of the quarter, 17 vessels were active in the Asia-Pacific region, The financial results are somewhat difficult to compare this time on a sequential basis, given the sizable increase in the vessels and the mix of the vessels in this broad region. However, we are pleased to enhance our presence in this region and believe that the momentum we're seeing in all of our other regions is similarly building in this region, and this region has a long-term opportunity, not just in traditional hydrocarbon activity, but in the rapidly advancing offshore wind market. Our G&A costs during the quarter totaled $27.8 million, which includes $7.3 million in professional fees and other transaction-related expenses associated with a SPO acquisition, along with a $3.9 million of SPO-related G&A expense I referred to earlier. Excluding fees and expenses associated with the transaction, G&A came in right about $20.5 million for the quarter. This compares to a pre-acquisition normalized G&A of $17 million in the first quarter. We continue to expect the G&A burden associated with the added vessels and the new regional office in Singapore via the SPO acquisition to level out next year at about $2.5 million per quarter. Free cash flow for the quarter was negative $14.9 million. As we mentioned on the prior two calls, we anticipated free cash flow in the first half of 2022 to be weighed down by a significant dry dock expense and vessel reactivations during the first half, of which we spent approximately $33 million during the first half of 2022, including the newly acquired vessels we expect to spend about $21 million in dry dock expense in the second half of 2022. We experienced a continuation of working capital build during the second quarter, part of which was the natural working capital build you'd expect to see in a quarter with a significant revenue growth and a sizable acquisition. But we also continue to have customers delay payments, contributing to about $15 million of the working capital build We anticipate collections picking up in the third quarter, and as we indicated on last quarter's call, we expect DSO to normalize by the end of the year. We remain confident that market conditions will result in our entire fleet working by the end of 2022, a combination of reactivations and disposing of non-core vessels. We made additional progress during the second quarter in disposing vessels available for sale, disposing of four vessels for total proceeds of $3.5 million. We ended the quarter with nine vessels remaining in the held-for-sale category, which includes one SPO vessel added as part of the acquisition. Vessel weight costs were $700,000 in the second quarter, down by about half quarter of a quarter, and costs associated with COVID-19 also continued to fall down to $800,000 in the second quarter. In summary, we are very pleased with the second quarter results so we believe that the remainder of 2022 will continue to be strong with another leg up in demand moving into 2023 in what has become an increasingly supply vessel constrained environment with that let me turn the call over to piers for an overview of the global market and the company's performance within it thank you quentin and good morning everyone