Tidewater Inc.

Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Incorporated Q3 2023 earnings 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 during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Wes Golger, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Eric. Good morning, everyone, and welcome to Tidewater's Q3 2023 Earnings Conference Call. I'm joined on the call this morning by our President and CEO, Quentin Neen, 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, November 7th, 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 Quentin.

Thank you, Wes. Good morning, everyone. Welcome to the third quarter of 2023 Tidewater Earnings Conference Call. In my prepared remarks today, I am going to focus on our success in integrating the SoulSat fleet, discuss the share repurchase program that we announced yesterday and how that fits within our broader capital allocation framework, and then provide some highlights of the third quarter and on our outlook for 2024. Pierce will give you more detail on the markets around the world, and then Sam will explain the financials in more detail and provide some more specifics on the 2024 guidance. Quarters in which you integrate a large acquisition are rarely as eloquent as one would prefer. So another objective today is to provide you with some information that allows you to bridge the balance sheet and income statement movements resulting from the acquisition. We announced the completion of the 37 Solstead vessel acquisition shortly after the end of the second quarter. We are thrilled with the quality of the vessels and the more than 1000 personnel who are now part of Tidewater. We remain excited about what the addition of this high specification PSV fleet means for our shareholders over the coming years as the market continues to recover. The team here put in a lot of work prior to the closing to ensure that Tidewater's regulatory, administrative, and information technology systems were adequately staged and prepared to accept the vessels, and that we were ready for the required customizations and configurations to the onboard operational applications for the equipment on the newly acquired vessels. Given that these vessels are all active, the physical integration process is transitioned one vessel at a time. and a schedule was designed to roll in vessels over time as they become naturally available to go through the roughly one and a half day change of management procedure. As of today, we have completed 32 of the 37 vessels through the full change of management procedures, and these vessels are fully integrated onto the Tidewater administrative and technology infrastructure. The scope encompasses the vessel's fleet-wide systems and onboarding vessels to Tidewater's HR, crewing, payroll, financials, purchasing, everything, AP, customer billing. We currently expect the remaining five vessels to be completed by the end of the month, and I want to extend a special thank you to the Tidewater and Solset teams, as well as our third-party providers, such as UNICEF and Ocean Technologies Group, who are all involved and dedicated to the successful integration. This is an amazing global team accomplishment to successfully transition all 37 vessels within five months of their acquisition date. The Solstead acquisition transaction was an asset purchase, so it lent itself to a more streamlined realization of G&A synergies, as we didn't have to onboard any personnel not immediately pertinent to supporting the newly acquired fleet. That dynamic played out as expected, and now that we have a substantial majority of the vessels inside of our infrastructure, we now expect the incremental annualized G&A for the new fleet to be about 3.5 million as compared to our initial view of $5 million, resulting in implied G&A synergies of $14.3 million and an incremental per day G&A cost per vessel of $260 per day. This is simply unmatched in our industry. The company's debt agreements allow for the repurchase of up to 50% of the company's trailing 12 months net income beginning on November 17, 2023. Accordingly, we announced in a press release that our board of directors has authorized the company to repurchase up to $35 million of our outstanding common stock, which is the maximum we can do at this time under those debt agreements. We will update the repurchase program quarterly based on our utilization of the program and the permitted amount available. We are pleased to be in a position such that we are generating meaningful free cash flow and are able to institute the share repurchase program. Given the long-term outlook for the industry, we believe that the intrinsic value of our shares is well above the current trading value. As such, we view the share repurchase program as another investment option we have to maximize value to our shareholders, in addition to the value of creative acquisitions and the solid execution of our business. Until we establish a long-term debt capital structure that is better matched to a cyclical business, we will limit our repurchases to the maximum of what is allowed under our debt agreements, which is currently $35 million, or to the anticipated net cash position six quarters out. Value-accretive acquisitions remain our first priority on capital allocation. It's difficult to predict if or when any value-accretive deals can be completed, but we will balance the share repurchase opportunity with the opportunities from acquisitions. Our philosophy will be to evaluate the return on any given acquisition to the return on share repurchases based on our view of the intrinsic value of the business. The positive momentum in the offshore vessel market continued during the third quarter. Tidewater continued to benefit from the global uplift in day rates, driven by the increasing demand for vessels and tight vessel supply, with day rates up over $1,800 per day and 11% movement from the last quarter. This is the largest absolute and percentage sequentially quarterly day rate increase since the recovery began. The average day rate is up now approximately $7,200 per day, or nearly 70% since the recovery began around the end of 2021. Every region and every vessel class experienced a modest to quite significant day rate increases during the third quarter, which speaks to the global tightness in vessel supply, driving day rates for every vessel class. The global uplift in our day rates is comprised of two major factors, the first of which is older contracts rolling off and recontracting at prevailing market rates. allowing us to continue to mark-to-market our fleet. The second factor is that leading edge term contracts continue to move meaningfully higher. During the quarter, we executed 27 term contracts with an average rate of approximately $28,600 per day, with the new contract distribution essentially in line with our vessel distribution. This compared to the leading edge day rate in Q2 of approximately $23,500 per day. This represents a nearly 22% sequential increase in leading-edge term day rates, essentially double the rate of sequential growth from Q1 to Q2. Further, the Q3 leading-edge term contract day rate was approximately 60% higher than the Q3 printed day rate. There's always a tradeoff between utilization and day rate when you're holding out for the best prices, and this quarter it more than worked out. We're still contracting short, but the average duration of the new contracts in the third quarter was approximately 10 months, slightly higher than the six and a half months in the second quarter. The uptick in duration is attributable to a few long-term contracts for some of our smaller tonnage and lower specification vessel markets. As we have talked about in the past, there is an iterative process as day rates reset. Where one boat class moves up as the day rates increase, customers will begin to look to find adequate substitutes in adjacent vessel classes where appropriate for the given work scope. As day rates in the smaller vessel classes approach parity with larger vessels, larger vessels have taken the next leg up. We saw that dynamic play out this quarter where the most relative day rate improvement came from the mid and small vessel classes. We are encouraged by this dynamic, as is the natural progression of day rates across the vessel spectrum in a supply constrained environment. We anticipate that as we enter the more active tendering part of the calendar in the first quarter, that we will continue to see day rate momentum in all of our vessel classes. For the third quarter, revenue increased 39% to $299 million, compared to $201 million in the second quarter. And ahead of the Q3 revenue guidance we provided on last quarter's call, The revenue growth was driven by the vessels acquired from SOLSTAD, but also by higher than anticipated day rates and a nice expansion in utilization, up over 2.5% sequentially to 82.1%. Utilization was below the expectation of 84% we laid out in the last quarter's call due to more time down for repairs than we had estimated. Gross margin was up 1%, excluding the $4 million of one-time charges associated with the SOLSTAD integration. We were pushing to be at 5 percentage points, but the additional time down for repair decreased revenue and increased costs. The 2% of excess downtime this quarter cost us $6 million in revenue and $6 million in costs, which would have been another 3 percentage points of gross margin. It's not uncommon for vessels to experience higher downtime as newly reactivated vessels return to high surface intensity after a period of low to mid-level intensity. but our recent experience has been higher than we anticipated. As we look forward to the fourth quarter, we expect revenue to increase to $309 million. This sequential revenue increase is 95% covered by existing backlog, with the remaining 5% anticipated to be picked up on spot work throughout the quarter. The guidance reflects 84% utilization. The risk to this guidance is unanticipated downtime and unanticipated weakness in the spot market. Sam will give you more details on our 2024 guidance, but our initial revenue guidance for 2024 reflects a year-over-year average day rate increase of over $4,000, in excess of the day rate increases we saw throughout 2022 and 2023, and well above the prior cycle annual increases of $1,500 per day. In summary, we are very pleased with the continued momentum across our business with revenue, margins, day rates, and utilization all continuing to move up. We are particularly pleased with the day rate progression across all of our regions and vessel classes and the integration of the newly acquired Solstead vessels. We remain highly confident that secular themes of the global shortage of vessels combined with increasing demand from a variety of demand drivers, including drilling, subsea construction, existing production, and offshore wind, will continue to bribe vessel owners with the ability to push up day rates and improve contractual terms as we go through 2024 and beyond. And with that, let me turn the call over to Piers for an overview of the geographic markets around the world and more color on the performance of individual vessel classes.