Tidewater Inc.

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Incorporated first quarter 2023 earnings conference call. 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 at that time, simply press star followed by number one on your telephone keypad. If you would like to withdraw your question, again, press star 1. Thank you. It is now my pleasure to turn today's call over to Mr. Wes Goucher, Vice President of Finance and Investor Relations. Sir, please go ahead.

Thank you, Brent. Good morning, everyone, and welcome to Tidewater's Q1 2023 Earnings Conference Call. I'm joined on the call this morning by our President and CEO, Quinton Neame. our Chief Financial Officer, Sam Rubio, and our Chief Commercial Officer, 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 are making 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, May 9, 2023. 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. and is 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 first quarter 2023 Tidewater Earnings Conference call. Before we get into the quarterly results, I want to start out the call by briefly updating you on our recently announced agreement to acquire 37 high specification PSVs from Solstead Offshore and our assessment of the recent market volatility on the outlook for our industry. As we talked about on the call we hosted to announce the acquisition, we are acquiring the Solstead PSV fleet for $577 million. We mentioned that we plan to finance the purchase of the acquisition through a $325 million bank facility led by D&B, incremental new debt and cash on hand. We continue to monitor the commercial banking and debt capital alternatives to optimize the cost of capital and financial flexibility. We are confident in our ability to finance the acquisition and expect the acquisition to close by the end of the second quarter. The unique aspect of the recent market volatility has been that it hasn't had an impact on chartering activity or price discussions. Since 2024, any time there has been a pullback in oil price or uncertainty in the global economy, it has been used to delay chartering decisions or, at the very least, to reset price talk. This does not happen this time, and we take it as a good sign that our customers, and more importantly, our competitors, realize that the world is short of all vessel types in all geographies. The first quarter was another positive period for the rapidly unfolding recovery in the offshore vessel market. The most important indicator of strength in our business, average day rate, continued its upward momentum during the first quarter, with average day rates up $1,100 per day sequentially. Average day rates within the business are now up approximately $4,000 per day since the recovery began around the end of 2021. Every region and every vessel class, except for our smallest class of anchor handlers, experienced modest to quite significant day rate expansion during the first quarter. This is particularly notable as the first quarter is often the slowest quarter of the year due to seasonality in certain markets, calendar year budgets, and the nature of contracting by our customers. The lack of available vessels globally against the backdrop of growing demand continued to push up global average day rates. During the first quarter, we entered into 51 term contracts for 44 vessels. The average day rate for the contracts associated with a subset of vessels was over $21,000, and this subset is a good representation of the entire fleet. The average duration of these contracts was about seven and a half months, which provides the opportunity to push day rates upward again as these contracts roll off into a market that continues to tighten. The leading edge composite average day rate of $21,000 per day is 44% above the average day rate for the first quarter, and a leading reason why we continue to have confidence in the revenue and vessel gross margin guidance for the year. While day rate performance and chartering activity remained strong during the first quarter, as mentioned earlier, we did experience the expected seasonality that occurs during the first quarter of the calendar year. Active utilization declined about 1.9 percentage points sequentially to 80.6%, principally driven by seasonal factors in the North Sea and the Mediterranean. Further, given the calendar year budgeting and chartering practices of many of our customers, we took advantage of what is generally a slower period to maximize the number of dry docks in the first quarter so as to prepare those vessels for the busier periods during the second, third, and fourth quarters of this year. As such, dry dock days were up about 41% sequentially, and dry dock expense was $31 million. Our calendar year dry dock guidance remains unchanged at $77 million. For the first quarter, revenue increased about 3% to $193 million, compared to $187 million in the fourth quarter. Average day rate was up about 8% sequentially. Vessel-level cash margin expanded two full percentage points to right at 40%. Our Americas fleet led the way with an 8% sequential improvement in day rate and 5% improvement in active utilization, with the Caribbean and Mexico subregions showing particular strength. Vessel-level cash margin improved considerably during the quarter, up 8 percentage points sequentially to just under 41%. We are quite excited about the outlook for this region, particularly the Caribbean, as this is a market that requires large vessels and continues to show material improvements in both near-term and long-term activity. The recovery in the Asia-Pacific region has lagged the rest of the other global offshore geographies. However, we've begun to see momentum emerge in this market as well. Day rates were up around 32% during the quarter, with significant improvements in both Southeast Asia and Australia. Active utilization did decline during the quarter, but that was principally due to interregional mobilizations and dry dock days. The decline in utilization due to this frictional unemployment was more than offset by the day rate increases, with revenue increasing 15% sequentially and vessel operating margins increasing nearly 16 percentage points to 43%. West Africa continued to show strong day rate increases during the year. Day rates improved 6% sequentially to just over $13,000 per day, now up about 48% from the same period in 2022. Vessel-level cash margin was essentially flat during the quarter as active utilization ticked down to 77% from 82% in the prior quarter. This drop in utilization was due to a handful of vessels mobilizing within the region and an increase in dry dock days. We expect utilization to rebound through the year, and we remain optimistic on the West Africa market in general, a combination of significant existing activity in the region, along with new development and greenfield activities in areas such as Namibia, Senegal, and Equatorial Chennai. Turning to the European and Mediterranean region, seasonality did play a factor during the first quarter, with active utilization dropping to about 83% from 88% in the prior quarter. Revenue declined about 7% sequentially and vessel cash margin declined nearly 3%. However, the average day rate improved during the quarter by about 2%. Interestingly, during the quarter, spot day rates for anchor handler vessels showed unusual day rate strength, with a few incidents of spot vessels achieving day rates north of $150,000 per day, signaling a general tightness in the anchor handler market. You may recall the North Sea experienced the highest anchor handler rates in the industry's history during the third quarter of last year, and based on the first quarter of this year, we suspect those record day rates to be tested. Furthermore, current estimates for E&P capital spending as we enter 2024 and beyond in the North Sea, particularly in Norway, as a result of the recently initiated tax incentive scheme, are orders of magnitude higher than their current levels. Given the tight vessel supply market along with substantial expected increases in demand, we are quite optimistic for the next few years in this geography. Lastly, turning to our Middle East region, during the third quarter, the average day rate improved by 2% to about $9,700 per day, and active utilization dropped modestly to 82.5%. Vessel cast margin came in right at 25%. Looking forward, expected capital spending by the major operators in this region continues to remain robust. This is a market where activity and capital spending have historically been fairly inelastic relative to global commodity prices. As such, the magnitude of spending and activity in this region is resulting in this market absorbing vessels from Southeast Asia, and as a result, The direct impact of additional activity in the region and the indirect benefits to areas like Southeast Asia should be meaningful over the coming years. Our G&A cost during the quarter totaled $23.5 million, which included approximately $1.4 million in professional fees and other transaction-related expenses associated with the SAWIRE acquisition. Excluding these items, G&A totaled $22.1 million, or about $88 million on an annualized basis. As it relates to synergies pertaining to the acquisition, I'm pleased to say we have successfully integrated the acquired business into Tidewater and achieved essentially 90% of the G&A and OPEX synergies we originally anticipated when we announced the transaction. In fact, the G&A synergies have been fully achieved with some additional operating expense synergies to be achieved over the remainder of 2023. I'm thankful to our team for making this transaction and transition a big success. Free cash flow for the quarter was $9.9 million compared to free cash flow of $53.3 million in the fourth quarter. In prior quarters, we've talked about the build in working capital that occurs naturally as revenue increases, as well as the build that's due to slower than anticipated customer collections. Overall, working capital in the first quarter actually remained fairly flat relative to the fourth quarter, although we remain focused on improving the accounts receivable collection times with our customers. The lower cash generation during the quarter was primarily attributable to dry docking capital expenditures and about $20 million of cash tax payments. Given the relatively lower remaining capital spent for the rest of the year and the one-time measure of a few of the tax-related items in the first quarter, we expect the cash flow performance to materially improve over the remaining quarters of the year. We ended the quarter with three vessels remaining in the held for sale category. We also have five vessels classified as stacked. We will evaluate the possibility of reactivating any of the remaining stacked vessels. For the remaining vessels held for sale, we are in active negotiations on two of the vessels and expect to close the sale of these during the second quarter. Vessel layup costs were $727,000 in the first quarter. In summary, we are very pleased with the continued momentum across our geographic regions and our vessel classes during the first quarter. And with that, let me turn the call over to Piers for an overview of the global markets and the company's performance within.