Q2 2020 Tidewater Inc Earnings Call
Welcome to earnings conference call second quarter 2020. My name is Sylvia and I'll 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 during The Question Answer session. If you have a question, please press * then 1 on your touchtone phone. Please note that this conference is being recorded. I turn the call over to Jason's family with his family may begin Sylvia. Good morning everyone and welcome to Tidewater earnings conference call for the quarter ended June thirtieth twenty. I'm joined in the cold this morning by president and CEO Quinton main 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 really different from that stated or implied by any comment that we 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 a website or through the SEC at sec.gov information presented on the call speaks only as of today, July 31st, 2020. And so you're advised that any time sensitive information. I no longer be accurate at the time of any replay also during today's call Will present both gaap and non-gaap financial measures a Reconciliation of gaap to non-gaap measures is included in the evenings, press release.
And now with that old tentacle over to Quinton.
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're doing on executing the plan. We outlined on the first quarter call and provide some updates to our outlook for the remainder of 20-25. 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 muscles. There are over fifty thousand ships around the world of all different types and today an estimated 200,000 plus Mariners are stranded on Thursday and in need of repatriation. I'm taking a moment on today's call to highlight their plight as they appear to have been forgotten by the government's rushing to address the more obvious concern that manifested by the pandemic shipping moves 80% of the global Commerce as an essential part of keeping the global economic recovery going so off 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 enables them to travel to and from Thursday.
group
the international chamber of shipping the international Maritime organization the international labor organization and the international transport workers Federation are all championing this issue with the extent that you can help this 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 I revised estimated Revenue 4020 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 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 operations of 130 million with a year further. We budgeted twenty million for frictional costs associated with a 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 up higher to their layup locations and the incremental cost of those vessels being and laugh.
This twenty million of cost gets us down to cash flow of 117 million General and administrative expenses. Now anticipated to be seventy seven million for the year a $4,000 improvement from the 81 million. We forecasted on the earlier call and that gets us to forty million up cash flow vessel disposals of forty million less Drive. Expenditures of 36,000 gets us another positive formula. We are still anticipating a liquidation of working capital net of taxes and other costs of twenty 1 million for the year. So our current wage 2020 album compared to the outlook on the last call has cash operating margin down approximately two million drug expenditures are up three million in general and administrative expenses are down four million down 1 million overall to A $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 impairment and other charges that total of 111.5 million for the quarter.
The first one pyramids of 55.5 million reflects two components the first relates to moving into the assets held-for-sale category twenty two additional vessels were the revised forecast a day race and utilizations resulted in a present value from continuing to operate those vessels that was lower than their current disposal value. So we moved them into the asset help for sale category and mark them to their anticipated net realizable value further in addition to the adjustment in Book value for those twenty two vessels. The second component is a similar mark-to-market adjustment on the 24 vessels that were already applied 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 disclosed with these vessels over the next twelve months.
All the regions of the world have been impacted by the downturn and the oil market and the pandemic the offshore oil and gas industry of Africa has been impacted disproportionately our activity levels in the West Africa 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 do from our joint venture in Angola the balance in excess of four hundred million in 2014 and 2015. And although the balance has been substantially reduced during the intervening years. The current pullback connectivity has resulted in those reassess the collectability of the remaining balance as a result of that assessment. We recognize an impairment of forty-two million dollars related but separate as a result of the decrease in immediate opportunity wage.
To expand our end goal and joint venture with our existing partner. We in 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 16.1 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. I mean Outlook in Nigeria. We recognize an impairment on the 12 million dollars to Tidewater by our joint venture there off and we established a liability for a $2000000 loan guarantee Tidewater provided to the joint venture back in 2013.
Delivering on our free cash flow objective for 2020 will result will require similar quarterly results in the third quarter and the fourth quarter as we achieved in the second quarter and the former is the same we must continue to minimize drydock expense. We must quickly lay up in D crew Idol vessels. We must timely collect what is due from us from large multinationals and National oil companies important Lee 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 forty million dollars forecasted for proceed from vessel disposals and we remain on track with 25,000 sold for $21 million in the first half of 2020 the generation gap 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 90% 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 few active vessels in the second quarter and our Europe Mediterranean, which had 14 viewer 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 told me you were 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 two thousand.
19 compared to $75
In the second quarter of 2020 which is a result of vessels going on higher and into layout.
Consolidated vessel operating costs for the quarters ended June 30th, 2020 and 2019 were 64.8 million and 80.4 million respectively the decrease your name is driven by the decrease in the number of active vessels, but also a 5% decrease in operating cost per act day our general and administrative expense for the quarters ended June thirty two thousand twenty thousand nineteen 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 expenses per active day down from fifteen eighty-seven in the prior-year to fourteen thousand one in the second quarter of this year depreciation expense for the quarter ended June Thirty 2020 and 2019 were 28.1 million and 25 million respectively the
Decrease in depreciation is due to the sale in 2019 of over forty muscles and the reclassification of the aforementioned 46 vessels to assets held-for-sale.
Looking at a result of the segment level despite the industry downturn our average Dave rates across the company improve approximately 10,000 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 complemented by a mix shift as lower day rates muscles were retired through our disposal program or went off higher early in the downturn.
Naturally, the the contract protections you get for lower specification lower day rates vessels are less and as a result, they tend to come up higher first in a pullback.
Our American segment Revenue decreases of 3% or 1.2 million during the quarter ended June Thirty $20 compared to the quarter ended June thirtieth two thousand and nineteen the decreases primarily the result of five. You were active vessels operating in the region your of year and driven by lower demand vessel operating profit for the Americas segment for the second quarter was 5.4. Excuse me, four point five million, one point six 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 Drive box and better back-up time in the second quarter of this year our Middle East Asia Pacific region had not been impacted as negatively as a major operators in the area did not cut back production. Like they didn't off areas of the world and consequently plan 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 Thirty
2020 as compared to the quarter ended June 30th, 2019 active utilization for the quarter increased to 76% from 75% average day rate increased almost 10% an average active vessels in the segment increased by to the Middle East Asia Pacific segment reported an operating profit of $600,000 for the quarter compared to an operating loss of two point 1 million the same quarter of the prior year.
For 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 Am Lower average day rates, which were down 2% However, active utilization increased 2% two percentage points during the quarter the segment reported an operating loss of 1.85 for the quarter ended June thirtieth, two thousand and twenty 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 costs, 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 a 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 countless lowered by 8 and active utilization a decrease 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 revenues almost entirely the result of lower demand caused by the down term as a significant number of vessels in Nigeria when up higher during the quarter.
That's all operating profit for the segment decrease from 3.1 million for the quarter ended June 30th, 2019 to an operating loss of four 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 daily basis when compared to both the previous quarter and the year ago quarter, each of our four regions have higher average day rates than the previous quarter operating cost per active day or 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 a higher operating margin percentages is compared to the previous quarter and the year of Gene a cause proactive vessel day is down on a sequential quarterly and year-over-year basis and down substantially on an absolute dollar basis.
We're generating more cash by operating a pure vessels at higher day rates and lower operating costs per vessels and at a lower G&A cost per vessel. We're doing this while carefully Mark in 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 going that way.
and with that
Sylvia we will open it up for questions.
Thank you. We will now begin the question-and-answer session. If you have any question, please press star one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hatch. If you need speaker phone. You may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press * then 1.
And our first question comes from Turner home from Clark's and Pluto.
Hey, good morning, gentlemen, and in Clinton and and Jason recipe congratulations on I think what was a pretty decent performance and and obviously incredibly challenging quarter and and maintaining certain wage positivity. I think it's it's it's commendable so so congratulations with that.
Thank you.
And and yeah, just I wanted to get a little bit of a feel for the underlying performance of the business acquaintance. And and there was one thing that that that that popped out of me in the numbers and that was just the Deepwater America said I told that that was up about 5 million dollars sequentially in terms of Revenue. Was there any like termination fees in there or is that just reflecting the underlying performance of the business office? No, I would certainly call that out Turner if there were that is just increasing activities in the Southern Caribbean so that that area that's been a relatively positive and off premise of bright spot around the world, which is Trinidad Suriname Beyond them. We had some boats going on higher in that region and they can they were scheduled to go on to higher and they went on higher this month.
Okay, great. I appreciate that the color and then just wanted to touch on business plan that you outlined in your prepared remarks and and I just I guess on the on the revenue perhaps first. Um, uh two things really is just sort of assumptions. I was wondering if if you might provide a little additional caller 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 onto his birth rates and then there's some spot utilization level. So so kind of any color around, you know, the flex and the sort of upside downside risk to to that sort of Revenue number. Um, and then I guess maybe just be interesting to hear your broader thoughts on on how the business feels like. It's stabilizing or or or maybe not table I think so I would question
No, no, no, very good very question. So, you know one thing I didn't mention in the prepared remarks. Is that the the backlog for the second half of the year is approximately 150 million dollars. So we start with back long as as a base. When we look at that that revenue forecast for the remainder of 2020 and then we make some assumptions as to offer contracts that have options that we believe will be executed and then just some general spot activity. Now, I'm not really expecting any spot activity in the third quarter just because we're in a transition phase where everyone can be companies are in the like all of our customers are reassessing their plans, but I do have some budgeted spot exposure in the fourth quarter off, you know, normally the fourth quarter is a bit of a ticked down. Yeah because they it's usually driven by the North Sea Market cuz of the the the weather based calendar your seasonality there, but those operations are already dead.
uh down significantly
And so I don't see we're going to I don't think I'm going to see as much of a pullback in the North Sea and q4s. We normally would and then expecting a little bit more increase in some of the better areas around the world. Okay. So you you guys feel like this is a pretty conservative view of a probably won't looked over the next great. And then I'm just on the cash flow. Peace. I know it's it's quite early to to think about next year just given the fluidity of the situation. We're all living through but you know in terms of cash flow the The Vessel disposal piece is is pretty meaningful and I just wondered if you kind of think about the fleet is the $40 billion dollar level that you're thinking about four this year. Is that something that could continue for another year at that level or is it a bit lower or a lot lower kind of what is the fleet rationalization?
And then 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 as as implied by the some of the numbers that I threw out there, I'm expecting about 19 million in the remainder of twenty-twenty from asset sales. And then I'm looking for another ten million in the second half of 2020. But if we get to the point what I'm anticipating we'll see is a bulb them in the Q4 or q1 time frame. I do see indications that people are rethinking their plans for 21 that it's your Pony back that people didn't a second quarter and really into the early part of the third quarter are being Revisited and so my anticipation is that we're going to see a bottom in activity in the first quarter of next year and then slowly increasing Twenty-One. But you know, we're not going to be back to where we were before this Crisis began by the end of twenty one, but will be I think we'll be closed and it's my expectation based on activity levels then Thursday.
Projections to them, you know, so my belief is that will be through the asset disposal program and I won't need to dispose of any additional vessels in the second half of one now if that doesn't come to fruition and and and will update our guidance on Twenty-One attorney when we do, you know the Q4 call but you know as as I think about 21,000, we're not to stabilize and pull back. I would I would add additional vessels naturally into that would help sale category cuz that tends to indicate to me that these fossils are you know, the lower marginal vessels aren't going to be problems.
Sure, I get that in thanks for thanks for that color. And I just think when one more question from from my side is really just turning to the balance sheet. And in your latest software, I guess the cash number is increased a little bit from from the previous report. So that's that's good and then you know in terms of you know compliance with the covenants and may I know the bond is still 2 years out in terms of maturity, but you know these things usually get addressed we'll head of immaturity is just kind of remind us of your so latest thoughts about Allen Street and the especially that bump.
Right. Well, thanks. So, you know, I'm definitely not worried about.
A covenant compliance who we when we modify the indenture in the fourth quarter of 2019. We stretched out the the financial governments. And so I'm actually I'm not worried at all on on punishment governance is it comes, you know, it comes to you know refinance or refunding that you will have to say the reality is we've got enough time today to pay off the bonds. Okay? Yeah, and then my intention is to continue to generate cash but there's a significant make-whole on those bonds. And so, you know paying them off early wage may not be economic. So we'll have to deal with that as we go through Twenty-One. But you know, I'm sitting with the cash on the balance sheet and and the measured amount of of debt out. I'm not going to be pacified even if it goes current.
Okay. Well, I think that's I think that's all for me quit and then again, I think 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 it's it's just warranted given the the level of difficulty you all must have been dealing with so yeah, I mean congratulations on the on the commendable performance and thanks for asking questions.
Absolutely. Thanks turn.
For calling question customer Patrick Fitzgerald from bear.
Yeah, hi guys. So the $150 million in backlog for the remainder of the year, you know, what's what's kind of the cancel ability of that if we see another kind of plunge and prices, let's hope not but but to the extent the fact that happens, you know, are these are these kind of like plans or these like firm contracts? Well, there's no taker pay contracts or very few in in that mix. They all suck cancellation Provisions most of the activity declines, you know have 30 to 90 day cancellation Provisions. That's why when they things got canceled in the beginning of Q2. We're going to see them home applier and 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 the North Sea was um a little bit more challenging it looked like um, could you just maybe that was just kind of expected to happen beforehand, but could you could you provide a little bit more color on you know, what happened there was what were a few major contracts canceled or off?
Any color on that would be helped.
So so normally you see an uptick in the second quarter and the third quarter and the North Sea Market if you usually the the summer were season and as a result, you use three and Q2 or stronger than q 4 and keep one in q1 usually be in the wait list. So, you know, it's not seem to have that type of down tick in the North Sea Market. However, that is the most volatile Market in the world the North Side Market, it collapses faster and everything faster than any of the other markets. So it it did we lost a significant number of high-dollar contracts in that area of the world principally in the UK sector wage and to some extent into the Mediterranean as well. We had a few votes that were anticipated going on higher in the Mediterranean that did not go in higher at that region is the Mediterranean UK sector in Norwegian sector wage.
Norwegian sector held on as we should have held on through Q2. I'm starting to see some weakness in qq3, but no, you know the boats and operate in in that market are off some of the most capable boats in the world. So when they go off higher, they don't go up higher for too long. They generally get redeployed into other areas of the world that are looking for those wage higher specification vessels or willing to take them at a discount which generally happens in this point in the cycle. So yes, it is down Sick in the in Q2 wage and the Northeast sector that wasn't anticipated when we budgeted the the the year. It's a volatile sector that I'm just use of that type of volatility through the downturns. My name is patient is of those vessels in due course, we'll get redeployed. I'm not those are not vessels that I would say move into the the assets held-for-sale category because those are the vessels that generally will be in demand around dead.
Okay. All right. Thanks and then you had 138 active vessels in the quarter off. How do you how do you see that kind of working out that number working out in in the future near near future I guess and is there any I mean your Fleet is obviously the size of your fleet was come down significantly. Um, is there any metrics you can provide on kind of what's remaining like, uh average age, I would imagine his come down significantly, you know, maybe dead weight capacity anything like that that would kind of highlight the month, you know, what's remaining in the fleet?
So obviously with a pullback in Revenue that we're anticipating for the second half of twenty 2138 will continue to be okay, you know where it lands at the end of Q4 is really difficult to say at this point. There's still a lot of factors to influence that outcome. But you know, I see that number down 15 to 20 vessels in the next six months for sure. Okay, as it relates to you know, the average age of the vessels average age of the actively today is just under ten and and the average age of the assets in The Help will help her cell category is just under Thirty month. So like to kind of give you some metrics on that on on on a dead weight on or on a link basis.
I'm 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 in the active Fleet and generally it's going to be the smaller the smaller and old stuff is in the assets held-for-sale counter. Okay. Could you remind remind US Army of the what are your options with the restricted cash after the amendment? Do you have to make a car offer or can it be below par?
Well, there's the indenture has a a bunch of permutations and calculations that you have to go through. There's a you know, I know I know there's a portion of it that gets off by capx and then some other items so but eventually once you hit the those elements you have to go out at a part off right I believe.
Okay, so would it be around the the twenty million that you have in restricted cash. Now, you would have to go out with the power offer wage eventually. Uh, no there is a there is a threshold that you have to get two before you're required to do that. I think that's I think it's twenty-five million. I'd have to check the indenture. You know for sure. Okay. No, thank you. I appreciate you answering all the questions.
Our next question comes from Peter Europe from ARS. Hey, good morning. Yep. I reiterate the comments a good survival skills and much-appreciated month. So the so question about just where these these ships that you're you're losing where they going. Is that just to scrap Market or is that just came late and capacity for somebody else know it's it's disproportionately to the the of Judah scrap Market, you know to the extent that we're getting out of a vessel class. Like we've generally get them out of the the crew class vessels in the United States. So if I sell those into other areas use in the United States, I'll do that just because it doesn't doesn't impact the office had a a demand for the my corset of essence. So if it's selling into an area that we don't operate in or a possible Clash that we we don't operate that wage.
Sell it into a continuing operations, but generally it's going into alternative markets or the scrap Market. Okay, and then one of their ideas is a part of the space and for your company's then off consolidation and some moves or some changes that impact industry structure itself. Can you talk about that at all? It just what's 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
Yeah, so I'm a big.
Fan of of consolidation in the industry. I think it is an important part of rationalizing the global and I I see consolidation as a step into focusing as well and companies like Tidewater have been everywhere and my intention is, you know to pull back in areas that previously mentioned that did mention on this call. But you know pulling back at home. I'm pulling back and at the southeast Asia you heard my comments earlier on Nigeria, you know, so certainly I believe that that vessel companies need to focus off in particular areas, maybe one maybe two maybe three at depends on the size of the fleet. And so I'm looking to to participate that and leave through that way. Anyway that I can the difficulty today. Is that a sign from us most every company out there has a toxic level of debt and the dead
Brewers are not willing to let go and are reasonable prices. So, you know, you know when I think about my you know, my my Outlook over the next couple of years, you know, I certainly believe that we're going to see an increase in demand as we go through the next eighteen months. Okay, and I want to make sure that step one we get there and that's why I'm 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 lose myself before I get to the upside down. And so I want I don't want to do anything that alters my ability for My Equity holders to reap the benefits of going through all this pain and so it's a looking for the right deal is 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 off.
right price for their assets
Okay. Have you seen more assets migrant into Banks? So you just I guess it's kind of sounds like Hey, we're on this for maybe that the verge of some former restructuring processes, but not quite there yet. Is that fair? Obviously, once something's restructuring a bank has taken things back or whatever right? I I I think the I do believe that so I'll take you back to all the you know, fourth quarter of last year, right? I think everyone was looking at a a a projection of increasing generalizations and day rates and Banks and capital providers at the time or of the opinion that they just have to take a little bit longer in order to get get power returns. If you will, you know, they're about
this pullback in the
The spring has a I think pushed a lot of people over the edge which went to your point and maybe the the coup de gras for a certain capital letters. I had not seen it happen yet, but I hear more dialogue about it happen. So so we you know, like you said we may be on the precipice of this and I look forward to if you're taking advantage of those opportunities, but I am from an action center when I haven't seen it happen yet. Okay. All right. 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.