Tidewater Inc. (TDW) Q2 2020 Earnings Report, Transcript and Summary

Welcome to the Earnings Conference Call Second Quarter 2020. My name is Sylvia and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Jason Stanley. Mr. Stanley, you may begin.

Thank you, Sylvia. Good morning, everyone and welcome to Tidewater’s earnings conference call for the quarter ended June 30, 2020. I am joined on the call this morning by our President and CEO, Quintin Kneen; our Chief Accounting Officer, Sam Rubio; and our General Counsel and Corporate Secretary, Daniel Hudson. During today’s call we will 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 may make during today’s conference call. Please refer to our most recent 10-Q for additional details on these factors. This document is available on our website or through the SEC at sec.gov. Information presented on this call speaks only as of today, July 31, 2020 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 will turn the call over to Quintin.

Thank you, Jason. Good morning, everyone and welcome to the second quarter 2020 Tidewater earnings conference call. Allow me to start off by making a few remarks on the ongoing pandemics impact on the shipping industry. I’ll then discuss how we are doing on executing the plan we outlined on the first quarter call and provide some updates to our outlook for the remainder of 2020. Finally, I will cover our consolidated quarterly results highlight some noteworthy items in our operating segments and then we will open the call up for questions. On our two most recent earnings calls, I mentioned the critical role the international travel infrastructure plays and moving our mariners around the world as they embark and disembark our vessels. There are over 50,000 ships around the world of all different types and today an estimated 200,000 plus mariners are stranded on vessels and in need of repatriation. I’m taking a moment on today’s call to highlight their flight, as they appear to have been forgotten by the government’s rushing to address the more obvious concerns manifested by pandemic. Shipping moves 80% of the global commerce and as an essential part of keeping the global economic recovery going. So my call to action is this, please join us in supporting the formal recognition of these individuals as key workers. This would exempt mariners from travel restrictions and enable them to travel to and from ships. Groups like the International Chamber of Shipping, the International Maritime Organization, the International Labor Organization and the International Transport Workers Federation are all championing this issue. To the extent that you can help us cause, I urge you to do so. When we last spoke, I outlined our revised outlook for 2020 and our performance in the second quarter was consistent with that revised outlook. We stated last quarter that our revised estimated revenue for 2020 was $395 million and the estimated cash operating margin would be 35%. We now anticipate full year revenue to be approximately $390 million, which is down $5 million from what we estimated as the full-year revenue on the last call. We still anticipate cash operating margins of 35%, which would result in cash from core operations of $136 million for the year. Further, we budgeted $20 million for frictional costs associated with the pandemic, and we still see this as the annual impact of the crisis. This is the increased cost of travel and salaries, cost of quarantine mariners, the cost of fuel to transit vessels coming off hire to their lay-up locations, and the incremental cost of those vessels being in a lay-up. This $20 million of cost gets us down to cash flow of $117 million. General and administrative expense is now anticipated to be $77 million for the year, a $4 million improvement from $81 million we forecasted on the earlier call and that gets us to $40 million of cash flow. Vessel disposals of $40 million less dry-dock expenditures of $36 million gets us another positive $4 million. We are still anticipating a liquidation of working capital, net of taxes and other costs of $21 million for the year. So our current 2020 outlook compared to the outlook on the last call has cash operating margin down approximately $2 million, dry-dock expenditures are up $3 million, and general and administrative expenses are down $4 million, down $1 million overall to $64 million of free cash flow for the year and consistent with what we laid out on the first quarter call. In light of the decrease in offshore vessel activity in our revised forecast of the slope of the recovery in the industry, we reassessed the fleet and certain receivables to us from our joint ventures in Africa. This reassessment resulted in impairments and other charges that totaled $111.5 million for the quarter. The vessel impairments of $55.5 million, reflects two components. The first relates to moving into the asset held for sale category 22 additional vessels were the revised forecasted day rates and utilization, resulted in a present value from continuing to operate those vessels that was lower than their current disposal value. So we move them into the asset held-for-sale category and mark them to their anticipated net realizable value. Further, in addition to the adjustment in book value for those 22 vessels, the second component is a similar mark-to-market adjustment on the 24 vessels that were already classified as assets held for sale. So we currently have a total of 46 vessels in this category, valued at $29 million and our intention is to dispose of these vessels over the next 12 months. Although all the regions of the world have been impacted by the downturn in the oil market in the pandemic, the onshore oil and gas industry of Africa has been impacted disproportionately. Our activity levels in West Africa are down over 80% and our operations in East Africa for the time being, have been completely shut down. Other areas of the continent were negatively impacted although more in line with the roughly 25% global average decline, we noted on the first quarter call. Since 2014, we have had a significant receivable due from our joint venture in Angola. The balance was in excess of $400 million in 2014 and 2015 and although the balance has been substantially reduced during the intervening years, the current pullback in activity has resulted in us reassessing the collectability of the remaining balance. As a result of that assessment we recognized an impairment of $42 million. Related but separate, as a result of the decrease in immediate opportunities to expand our Angolan joint venture with our existing partner, we and our partner mutually agreed to dividend out, substantially all of the cash held by the joint venture. That resulted in the receipt by Tidewater of $17.1 million of cash in the quarter and dividend income of the same amount. Also on the continent of Africa, as a result of the steep decline in the business and the outlook in Nigeria, we recognized an impairment on the $12 million owed to Tidewater by our joint venture there and we established a liability for a $2 million loan guarantee, Tidewater provided to the joint venture back in 2013. Delivering on our free cash flow objective for 2020 will require similar quarterly results in the third quarter and the fourth quarter as we achieved in the second quarter. And the formula is the same. We must continue to minimize dry-dock expense. We must quickly lay-up and de-crew idle vessels. We must timely collect what is due from us from large multinationals and national oil companies and importantly, we have to dispose of older lower specification vessels. All executed well in the second quarter and all achievable in the second half of 2020 as well. Right now, we have $40 million forecasted for proceeds from vessel disposals and we remain on track with 25 vessels sold for $21 million in the first half of 2020. The generation of free cash flow remains our key focus and is the key determinant of our cash incentive compensation. In the second quarter, we generated revenue of $102.3 million, which is a decrease of 19% from the same quarter in the prior year. This was principally driven by decreases in vessel activity in our West Africa segment, which had a fewer active vessels in the second quarter and our Europe Mediterranean segment, which had 14 fewer active vessels. Both segments were significantly affected by the decrease in demand caused by the pandemic and the general oversupply of oil. Overall, we had 26 fewer average active vessels in the second quarter of 2020 then in the second quarter of 2019. In addition, active utilization decreased from 79% in the same period in 2019 compared to 75% in the second quarter of 2020, which is result of vessels going off-hire and into lay-up. Consolidated vessel operating costs for the quarters ended June 30, 2020 and 2019 were $64.8 million and $80.4 million respectively. The decrease year-over-year is driven by the decrease in the number of active vessels, but also a 5% decrease in operating cost per active day. Our general and administrative expense for the quarters ended June 30, 2020 and 2019 were $17.6 million and $23.7 million respectively, which is down 23% year-over-year. The significant restructuring of our executive management and corporate administrative functions in 2019 and ongoing cost measures resulted in this 12% decrease in G&A expense per active day, down from $1,587 million in the prior year to $1,401 million in the second quarter of this year. Depreciation expense for the quarter ended June 30, 2020 and 2019 were $28.1 million and $25 million respectively. The decrease in depreciation is due to the sale in 2019 of over 40 vessels and the reclassification of the aforementioned 46 vessels to assets held for sale. Looking at our results of the segment level, despite the industry downturn our average day rates across the company improved to approximately $10,800 for the quarter, up approximately 3% from the same quarter last year. This was driven by a tailwind of increasing day rates from contracts entered into before the crisis began and complemented by a mix shift as lower day rate vessels were retired through our disposal program or went off hire early in the downturn. Naturally, the contract protections you get for lower specification, lower day rate vessels are less, and as a result, they tend to come off hire first in the pull back. Our Americas segment saw revenue decreases of 3% or $1.2 million during the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019. The decrease is primarily the result of five fewer active vessels operating in the region year-over-year driven by lower demand. Vessel operating profit for the Americas segment for the second quarter was $5.4 million, excuse me, $4.5 million, $1.6 million higher than the prior year quarter. The higher operating profit was due to a $3.5 million decrease in operating expenses, resulting from fewer dry-docks and better vessel uptime in the second quarter of this year. Our Middle East Asia-Pacific region had been impacted as negatively as a major operator in the area did not cut back production like they do in other areas of the world and consequently, planned vessel activity increases commenced in this region, whereas in other regions there was a sharp pullback. Vessel revenues increased 17% or $3.5 million during the quarter ended June 30, 2020 as compared to the quarter ended June 30, 2019. Activity utilization for the quarter increased to 76% from 75% average, day rate increased almost 10% and average active vessels in the segment increased by 2%. The Middle East Asia Pacific segment reported an operating profit of $600,000 for the quarter compared to an operating loss of $2.1 million for the same quarter of the prior year. For our Europe and Mediterranean region our vessel revenues decreased 41% or $14.4 million compared to the year ago quarter. The lower revenue was driven by 14 fewer active vessels and lower average day rates, which were down 2%. However, active utilization increased 2 percentage points during the quarter. The segment reported an operating loss of $1.8 million for the quarter ended June 30, 2020 compared to an operating profit of $2.8 million for the prior year quarter due to decreased revenue, partially offset by $7.9 million of decreased operating cost, which was primarily due to lower personnel and lower repair and maintenance costs associated with the drop in active vessels. Finally to West Africa where vessel revenues in the segment decreased 32% or $10.6 million during the quarter compared to the same quarter of the prior year. The active vessel count was lower by – inactive utilization decreased from 76% during the second quarter of 2019 to 55% during the second quarter of this year. Average day rates increased 13% due to the vessel mix of remaining contract, similar to what I mentioned earlier. The decrease in revenue was almost entirely the result of lower demand caused by the downturn as the significant number of vessels in Nigeria went off hire during the quarter. Vessel operating profit for the segment decreased from $3.1 million for the quarter ended June 30, 2019 to an operating loss of $4 million in the current quarter due to the decrease in active utilization. Although the magnitude of the business is shrinking, free cash flow generation is increasing. As indicated by the press release, our average day rate was up on a consolidated basis when compared to both the previous quarter and the year-ago quarter. Each of our four regions had higher average day rates than the previous quarter. Operating cost per active day are down 10% from the previous quarter and down 4% from the year ago quarter. Of course, because of those facts on a consolidated basis, we had higher operating margin percentages, as compared to the previous quarter and the year-ago quarter. G&A cost per active vessel day is down on sequential quarterly and year-over-year basis and down substantially on an absolute dollar basis. We are generating more cash by operating fewer vessels at higher day rates of lower operating cost per vessels and at a lower G&A cost per vessel. We are doing this while carefully minding the capital expenditure and working capital investments. The company is free cash flow positive and our objectives and compensation are all geared to keeping it go in that way. And with that Sylvia, we will open it up for questions.

Thank you. [Operator Instructions] And our first question comes from Turner Holm from Clarksons Platou.

Hey, good morning, gentlemen, Quintin and Jason and rest of the team, congratulations on, I think what was a pretty decent performance and obviously incredibly challenging quarter and maintaining sort of cash flow positivity. I think it’s commendable so congratulations with that.

Thank you.

And just I wanted to get a little bit of a feel for the underlying performance of the business, Quintin, and there is one thing that popped out of me in the numbers and that was just the deepwater Americas segment, I thought that was up about $5 million sequentially in terms of revenue. Was there any like termination fees now or is that just reflecting the underlying performance of the business?

No, but certainly, call it out, Turner, if there were. That is just increasing activities in the Southern Caribbean so that area that’s been a relatively positive and relatively bright spots around the world, which is kind of Trinidad, Suriname, Guyana. We had some boats going on higher in that region and they can – they were scheduled to go hire and they went on hire as scheduled.

Okay, great. I appreciate that the color. And then, just wanted to touch on business plan that you outlined in your prepared remarks and really just I guess on the revenue perhaps first, two things, really is just the sort of assumptions. I was wondering if you might provide us a little bit additional color on how you all kind of think through the revenue performance for the rest of the year. Is it just sort of assuming the contracts that are already sort of booked, roll off on the spot rates and then there is some spot utilization level, so kind of any color around the flex and sort of upside-downside risk to that sort of revenue number? And then I guess maybe just the interesting to hear your broader thoughts on how the business feels like its stabilizing or maybe not stabilizing. So that was the question.

No, fair – good and fair question. So one thing I didn’t mention in the prepared remarks is that the backlog for the second half of the year is approximately $150 million. So we start with backlog as a base. When we look at that revenue forecast for the remainder of 2020. And then we make some assumptions as to contracts that have options that we believe will be executed, and then just some general spot activity. Now, I am not really expecting any spot activity in the third quarter. Just because we are in this transition phase where everyone E&P companies are and the like, all of our customers are reassessing their plans. But I do have some budgeted spot exposure in the fourth quarter. Normally the fourth quarter is a bit of a tick down because they – it’s usually driven by the North Sea market because of the weather based calendar and your seasonality there, but those operations are already down significantly. So I don’t see, we are going to, I don’t think we see as much of a pull back in the North Sea in Q4 as we normally would and then expecting a little bit more increase in some of the better areas around the world.

Okay. So you guys feel like this is a pretty conservative view of how the world looks over the next 6 months?

Yes, definitely.

Okay, great. And then just on the cash flow piece, I know it’s quite early to think about next year just given the fluidity of the situation, we are all living through. But in terms of cash flow, the vessel disposal piece is pretty meaningful and I just wondered if you kind of think about the fleet is the $40 million level that you are thinking about for this year? Is that something that could continue for another year at that level or is that a bit lower or a lot lower, kind of what is the deserve fleet rationalization and sort of cash flow conversion out of that look like as you kind of think forward for the next year or so?

Well, as implied by some of the numbers I threw out there, I am expecting about $19 million in the remainder of 2020 from asset sales and then I am looking for another $10 million in the second half of 2020. But if we get to the point, what I am anticipating we will see is a bottom in the Q4, Q1 timeframe. I do see indications that people are rethinking their plans for ‘21 that the [Technical Difficulty] back that people did in the second quarter and really into the early part of the third quarter are being revisited and so my anticipation is that we are going to see a bottom and activity in the first quarter of next year and then slowly increasing throughout ‘21. I think we are not going to be back to where we were before this crisis began by the end of ‘21, but we will be – I think we will be close, that’s my expectation based on activity levels and projections today. So my belief is that we will be through the asset disposal program, and I won’t need to dispose of any additional vessels in the second half of ‘21. Now if that doesn’t come to fruition, and we will update our guidance on ‘21, Turner, when we do the Q4 call, but as I think about ‘21, if it were not to stabilize, we can pull back. I would add additional vessels naturally into the asset held for sale category because that tends to indicate to me that these vessels, the lower, but marginal vessels aren’t going to be profitable.

Sure. I get that and thanks for that color. And I just think one more question from my side is really just turning to the balance sheet and your latest thoughts there. I guess the cash number has increased a little bit from the previous report, so that’s good. And then in terms of compliance with the covenants and I know the bond is still 3 years out in terms of maturity, but these things usually get addressed well ahead of their maturities. Can you just kind of remind us of your – so latest thoughts about the balance sheet and especially that bump?

Right, well, thanks. So I am definitely not worried about covenant compliance. When we modified the indenture in the fourth quarter of 2019, we stretched out the financial covenants and so, I am actually not worried at all on financial covenants. When it comes to refinance or refunding that, you will have to see. The reality is, we have got enough cash on the balance sheet today to pay off the bonds, okay. And my intention is to continue to generate cash, but there is a significant make-hole on those bonds. And so you know paying them off early, it may not be economic. So we will have to deal with that as we go through ‘21, but I am sitting with the cash on the balance sheet and commensurate amount of debt outstanding. I am not going to be passed by it, even if it goes current.

Okay. Well, I think that’s all from me Quintin and again, I think it’s fair to say that you guys did a really good job in a tough quarter. It’s not usually my style to say that, but I think in this particular case, I think it’s warranted given the level of difficulty you all must have been dealing with. So yes, congratulations on a commendable performance and thanks for answering the questions.

Absolutely. Thanks, Turner.

Our following question comes from Patrick Fitzgerald from Baird.

Yes. Hi, guys. So the $150 million in backlog for the remainder of the year, what’s kind of the cancelability of that if we see another kind of plunge in prices, let’s hope not, but to the extent that happens, are these kind of like plans or these like firm contracts?

Well, there is no take or pay contracts are very few in that mix. They all have cancellation provisions. Most of the activity declines have 30 to 90-day cancellation provisions. That’s why when things got canceled in the beginning of Q2, we are starting to see them come off higher in Q3, but it’s certainly our best guess as to what the revenue will be – best estimate of what the revenue will be for the second half of 2020.

Okay. And then the North Sea, I mean obviously, you guys had a good quarter given the circumstances but the North Sea was a little bit more challenging, it looked like. Could you just – maybe that was just kind of expected to happen beforehand, but could you provide a little bit more color on what happened there? Were a few major contracts canceled or any color on that would be helpful?

Okay. So normally you see an uptick in the second quarter and the third quarter and the North Sea market. If you usually – the summer work season and as a result, Q3 and Q2, are stronger than Q4 and Q1, and Q1 usually being the weakest, okay. So, no, it’s not planned to have that type of down on the tick in the North Sea market. However, that is the most volatile market in the world, the North Sea market. It collapses faster and it recovers faster than any of the other markets. So it did –we also significant number of high dollar contracts in that area of the world, principally in the UK sector and to some extent, into the Mediterranean as well. We had a few boats that were anticipate is going on hire in the Mediterranean that did not go on hire, that regions and Mediterranean UK sector and Norwegian sector. Norwegian sector held on – initial held on through Q2 uncertainties some weakness in Q3, but no, the boats that operate in that market, are some of the most capable boats in the world. So when they go off hire, they don’t go off hire for too long. They generally get redeployed into other areas of the world that are looking for those higher specification vessels or willing to take them at a discount, which generally happens in this point of the cycle. So, yes, it is a downtick in Q2 in the North Sea sector that wasn’t anticipated when we budgeted the year. It’s a volatile sector that I am used of that type of volatility through the downturns. My anticipation is of those vessels in due course will get redeployed. Those are no the vessels that I would say move into the, the asset held for sale category because those are the vessels that generally will be in demand around the world.

Okay, alright. Thanks. And then, you had 138 active vessels in the quarter, how do you see that kind of working out – that number working our in the future – near future I guess? And is there any, I mean your fleet is obviously – the size of your fleet has come down significantly. Is there any metrics you can provide on kind of what’s remaining like average age, I would imagine has come down significantly, maybe deadweight ton capacity, anything like that would kind of highlight the – what’s remaining in the fleet?

So obviously with the pullback in revenue that we are anticipating for the second half of 2020, that 138 will continue to go down, okay. Where it lands at the end of Q4 is really difficult to say at this point. There is still a lot of factors to influence that outcome. But I can see that number down 15 to 20 vessels in the next 6 months for sure, okay. As it relates to the average age of the vessels, the average age of the active fleet today is just under 10 and the average age of assets in the held for sale category is just under 13, okay. So that to kind of give you some metrics on that. On our deadweight ton or on a linked basis, I am sure Jason can get that for you. I don’t think of it in those terms it’s not as relevant to me. I will tell you that disproportionately they are going to be the younger larger assets that are in the active fleet and generally it is going to be often the smaller and older tonnage that is in the assets held for sale category.

Okay. Could you remind us or me of what are your options with the restricted cash after the amendment do you have to make par offer, can it be below par?

Well, there is the indenture has a bunch of permutations and calculations that we have to go through. There is a – I know there’s a portion of it that gets offset by CapEx and some other IPs. So, but eventually once you hit those elements you have to go out at a par offer, I believe.

Okay. So would it be around the $20 million that you have in restricted cash now, you would have to go out with a par offer eventually?

No, there is a threshold that you have to get to before you’re required to do that. I think that’s – I think its $25 million. I have to check the indenture, not sure.

Okay. No, thank you. I appreciate you answering all the questions.

Of course.

Your next question comes from Peter Ehret from ERF.

Hey, good morning. I reiterate the comments a good survival skills and much appreciated. So the – so question about just where these ships that you are losing, where are they going, is that just to scrap market or is that just latent capacity for somebody else?

No. It’s disproportionately to the scrap market. To the extent that we are getting out of our vessel class, like we have generally gotten out of the, the crew boat class of vessels in the United States. So if I sell those into other areas in United States. I will do that just because it does not, it doesn’t impact the strata of demand for the – my core set of vessels. So if it’s settling into an area that we don’t operate in or a vessel class that we don’t operate, then I will sell it into a continuing operations, but generally it’s going into alternative markets or the scrap market.

Okay. And then one other ideas as a part of the space and for your company has been consolidation and some moves or some changes that impact industry structure itself. Can you talk about that at all. I just what is going on with competitors, is that moment upon us where we can see some, some consolidation and some change in industry structure and what your potential participation or even leadership in that might look like?

Yes. So I’m a big fan of consolidation in the industry. I think it is an important part of rationalizing the global fleet, okay and I see consolidation as I step into focusing as well. Companies like Tidewater have been everywhere and my intention is to pull back an areas that I’ve previously mentioned, I did not mention on this call but pulling back out of Brazil or pulling back out of Southeast Asia, you heard my comments earlier on Nigeria. So certainly I believe the vessel companies need to focus in a particular areas, maybe one, maybe two, maybe three, that depends on the size of the fleet. And so I am looking to participate that and lead through that in any way that I can. The difficulty today is that, aside from us, most – every company out there has a toxic level of debt and the debt holders are not willing to let go our reasonable prices. So when I think about my outlook over the next couple of years, I certainly believe that we’re going to see an increase in demand, as we go through the next 18 months, okay. And I want to make sure the step one, we get there, and that’s why I am very focused on managing the cost structure and managing the vessels that are operating, so that we continue to be free cash flow positive, okay. And then step two is, I don’t want to dilute myself before I get to the upside. And so I don’t want to do anything that alters my ability from my equity holders to reap the benefits of going through all this pain. And so looking for the right deal is key, unfortunately a lot of that consolidation that I think would naturally otherwise occur, is being held up by capital providers that are not willing to take the right price for their assets.

Okay. Have you seen more assets migrating to banks? So you just, I guess it’s kind of sounds like hey, we are on so maybe the verge of some formal restructuring processes, but not quite there yet. Is that fair? And obviously once something’s restructuring a bank is taking things back or whatever right?

In think that – I do believe that – I will take you back to fourth quarter of last year, right. I think everyone was looking at an up projection of increasing utilizations and day rates and banks and capital providers at the time, we’re of the opinion that they just have to hold on a bit longer in order to get par returns, if you will, you know thereabouts. There is pullback in those spring has – I think pushed a lot of people over the edge, which, to your point, and maybe the [indiscernible] certain capital providers, I haven’t seen it happen yet, but I hear more dialog about it happening. So, we – like you said, we may be on the precipice of this, and I look forward to taking advantage of those opportunities, but from an action standpoint, I haven’t seen it happened yet.

Okay. Alright, good. Thank you.

Thank you.

We have no further questions at this time.

Okay. Thank you, Sylvia. Thank you everybody else for attending the call this morning. We hope you have a safe rest of your day and a good weekend.

Thank you. Ladies and gentlemen this concludes today’s conference. Thank you for participating. You may now disconnect.