Q3 2020 Tidewater Inc Earnings Call
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Welcome to <unk> earnings Conference call third quarter 2020, My name is Sylvia and up your operator for today's call.
At this time all participants are now in listen only mode. Later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press Star then one and you touched home phone. Please.
Please note that this conference is being recorded.
I will now turn the call over to Jason Scam, you Vice President of Investor Relations and BSG Mr. Stanley you may begin.
Thank you Sylvia good morning, everyone and welcome to Tidewater things conference call for the quarter ended September Thirtyth 2020.
Im joined on the call this morning.
By our President and CEO, Quintin, Kneen, Chief Accounting Officer, Sam Rubio, Our general Counsel and corporate Secretary Secretaries, Daniel Hudson and.
And our vice president of sales and marketing peers middle from.
During today's call, we'll 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 make during today's conference call. Please.
Please refer to our most recent 10-Q for additional details on these factors.
This document is available on our website or through the FCC at SCC Dot Gov.
Summation presented on this call speaks only as of today November six 2020, and so you are 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'll turn the call over to Clinton.
Thank you Jason Good morning, again, everyone and welcome to the third quarter 2020, Tidewater earnings Conference call.
I'm pleased to say that this has been a solid quarter a tidewater against the ongoing challenges of the pandemic. We continue to successfully execute on the strategy, we outlined on the first quarter earnings call.
Before we dive into the consolidated quarterly results.
View, our operating segments and open the call up for questions.
First lets discuss some noteworthy developments are tidewater since we last spoke.
The first is the appointment of two new board members lower Sip Rocky President and CEO of International Seaways from also recently appointed Commodore of the Connecticut Maritime Association.
And Darrin Anderson, President and CEO of Ranger Energy services.
Both new directors bring brought in.
Industry and a diversity of insight to our board governance and decision, making processes and we're excited to have them aboard.
Also joining me on the call today is peers Middleton Pierce joined tiered Tidewater in the third quarter and is leading up global sales and marketing I'm excited to have here is on board as we fill out the management team and position Tidewater for the future of offshore energy services. In addition to sales and marketing peers will be assisting in the strategic.
Valuation of hydrocarbon and renewable investment opportunities at least position tidewater to benefit from the offshore energy activities over the next 20 years.
You may have picked up in the press the announcement of our acquisition of 11 crew boats from Hermitage offshore services earlier in the fourth quarter.
These vessels will strengthen our position in Angola, and West Africa, and expand our market share with a total of 27 active vessels in the region.
Given their relatively new condition. They will also reduce the average age of our active crew boat fleet.
This acquisition, formerly part of our ongoing fleet rationalization program and opportunistic approach to M&A as we continue to divest our oldest least efficient and least profitable vessels, we create space in the fleet for a higher quality newer and more efficient vessels to maintain the right scale of our operations.
Given the location of our West Africa Shore base, we believe Tidewater will be able to manage these vessels in a manner that will be easily accretive to our fleet profitability six of the vessels are already under contract.
We continue to focus on reducing our net debt commitments and further improving our peer leading leverage ratio. This quarter. Tidewater is once again cash flow positive with $30 million of free cash flow and for the nine month period, thus far in Twentytwenty, we are free cash flow positive, even before including the cash generated from asset divestments.
We are proud to be on track to be free cash flow positive for the full year 2020.
During the third quarter, we repurchased 28 million face value of our 2022 notes for 95% of far.
On Tuesday, we launched a tender for another 50 million and we simultaneously launched a consent for the modification of certain terms within the intention principally the financial covenants.
We look forward to continuing to reduce this debt and improving our net debt position through our dedication to remaining free cash flow positive.
The debt repurchases in the third quarter and the current tender are part of our ongoing program to position the company to refinance or just simply repay the bonds when they mature and 20 to 22.
We stated last quarter that our revised estimated revenue for Twentytwenty was $390 million and Thats estimated cash operating margin would be 35%. We now anticipate full year revenue to be approximately $385 million, which is down $5 million from what we estimated us full year revenue on the last call.
We still anticipate cash operating margins of 35%, which would result in cash from core operations of $135 million for the year.
Further we budgeted 20 million for frictional costs associated with the pandemic and we still see that as the annual impact of the prices.
This is the increased cost of travel and salaries the cost of quarantine Mariners cost of fuel to transit vessels coming off hire to their last locations and the incremental cost of having those vessels in layup.
In particular for the fourth quarter, we anticipate higher fuel costs related to vessels transiting to their land position excess salaries until we can decrease the vessels, which is what we've experienced in the second and third quarters and then an increase in the lump sum cost of Mariner severance as the vessels already accrued all in we see these extra costs and 22.
20 to be $20 million.
This $20 million of pandemic costs gets us down to cash flow of $115 million.
General and administrative expenses have remained a focus for tidewater, we've been successful in reducing costs wherever possible, both onshore and offshore and I'm pleased to say that DNA is once again down this quarter to $17 million was full year now anticipated to be $72 million. This is another $5 million improvement from the $77 million.
Forecasted on the earlier call and that gets us to $43 million of cash flow for the year.
Our teenage cost continue to come down Thats now seven consecutive quarters of gene a run rate cost reductions our annualized DNA expense for the third quarters under 70 million as a couple of data points to the combined 2014 annual Gionee for Tidewater and Gulfmark Standalone was $253 million and the.
Immediate run rate post merger was $145 million with up post integration objective of $100 million.
We will continue to seek techniques and processes to remain the low cost leader in terms of shore based operations. However, when we fill the open CFO position, we will see a noticeable increase in DNA costs for that role and its associated support expenses.
Vessel disposals are now looking to be $38 million less dry dock expenditures of our revised $35 million for the year, which nets us another $3 million and as I mentioned earlier, we purchased the 11 hermitage vessels for 5 million. So net vessel investments for the year will be $2 million.
We are anticipating a liquidation of working capital net of taxes and other costs of $21 million. So all told we are anticipating 43 million of cash flow from vessel operations less 2 million of net vessel investments and $21 million of cash from working capital and other for a total of 62 million free cash flow.
So for the year.
All very achievable, but one area that on bothered about from a timing of cash receipts perspective, as a continued generation of cash from the liquidation of working capital. We have one customer the national oil company of Mexico, which is delaying payments to many of us vendors, including Tidewater.
Disappointing and frustrating that we have to endure this from a triple B rated enterprise, but I am not at this time worried about the ultimate collectability of the amounts due.
Delivering on our free cash flow objective for 2020, we will require similar quarterly results in the fourth quarter as we achieved in the second and third quarters and the Formula is the same we must continue to minimize dry dock expense.
Quickly lay out the decrease 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, thus far in 2020, and all achievable in the fourth quarter as well.
Our vessel disposal program continues to progress with 47 vessels sold year to date as previously mentioned, we now expect proceeds of $38 million in 2020, and this was somewhat dependent on the ability of the recycling yards to continue to manage their increasing backlog of tonnage from all over the shipping sector the sale and.
Disposal of our older tonnage as much of it stack and unlikely to return to service makes a material impact of stacking costs and further highlights the benefits of rationalizing the fleet during this downturn.
All of this leaving us ready to enter recovered market with a truly optimized and cash generative fleet.
And now it's my pleasure to turn the call over to peers for an overview of the markets in our key operating areas.
Thank you Clinton.
Good morning, everyone.
As we mentioned in our earnings release in the third quarter and nine months ended we generated revenue of $86.5 million and $305.2 million respectively.
Which is a decrease of 17% for the same nine month period in 2019.
Losses goes away, it's disappointing to not be knocking out of the park every quarter. We believe this is an amazing Testament to our teams around the world has managed to keep the majority of defeat working working and earning against not just the serious headwinds caused by but by the pandemic and subsequent falloff of short term vessel demand, but also against on increasingly aggressive.
Competitors fighting to survive.
As mentioned on previous earnings calls, our West Africa, Europe Mediterranean fleets continue to bear the brunt of the decrease in activity.
Globally, we had 45 fewer average active vessels in the third quarter of 2020 and in the third quarter 2019.
In addition, last active utilization slightly decreased from 80% in the same period in 2019 compared to 78 cents. The thirdquarter 2020, we managed to increase utilization by 4% compared to the second quarter.
Looking at our results at the regional level.
Despite the industry downturn, our average day rates across the fleet stayed pretty static compared to last quarter at $10500 per day, instead off approximately 5% against the same quarter last year.
This is still driven by the previous Tailwinds of increasing day rates from contracts entered into before the crisis began but also by capital management of the active vessels stacked fleet, helping our regional teams maintain some commercial discipline when bidding to any new work.
Winning work at any cost in our view is not as successful long term strategy.
In the Americas region, we saw revenue decreases of $4.4 million or roughly 13% during the quarter ended September 30th Twentytwenty compared to the quarter ended September 32019.
The decrease is primarily the result of 75 active vessels operating in the region year on year compared to three in the previous quarter caused by the lower demand. However.
However, the region still maintained a small vessel operating profit in the third quarter of $107000 in the year to date vessel operating profit of $3.5 million.
Utilization for the quarter was at similar levels to 2019 at 82%.
The region still faces challenges, but we believe a flight to quality tonnage continued castle control of operating expenses and commercial discipline stands us in good stead in the region going forward.
Our Middle East Asia Pacific Region continued to see strong demand relative to the rest of the world with utilization and average day rates, both ticking up slightly from the second quarter Twentytwenty.
The active fleet decreased by two vessels from the previous quarter.
On average rates in the region $8040 per day compared to $8009 in Q2 of 2020 and $7520 per day in Q3 2019.
Vessel revenue was up $515000 compared to Q3 2019, making the vessel operating loss for the year to date $2.5 million compared to a loss of $4.1 million in Q3 29 team.
We remain positive the demand going forward will remain relatively stable in the region, especially in the middle East. Although we have also had some recent success picking up some contract awards in Asia Pacific as well.
In the Europe, and Mediterranean region, our vessel revenues decreased 14% or $2.9 million compared to the second quarter of this year.
The lower revenue was driven by having five fewer active vessels in the region. However, we were able to increase average rates for the quarter by roughly 5% compared to the second quarter Twentytwenty I'm, almost 10% compared to the third quarter of 2019.
Utilization for the quarter also improved significantly over 95% compared to 86% for the same quarter last year.
The segment reported an operating loss of $3.9 million for the quarter ended September Thirtyth 2020 compared to an operating loss of 276000 for the prior year quarter.
Which mainly is due to decreased revenue.
Was the winter months, so historically cost at the European market, we are starting to see some activity in the European and Mediterranean regions from all companies looking to either repeat campaigns that were delayed from early in the year. We're all hoping to take advantage of the perceived oversupply of idle tonnage by coming out to new longer term tenders, presumably hope.
Things pick up some cheap vessel cover going forward.
Finally to West Africa, where the region as a whole continues to struggle.
Vessel revenues decreased 30% or $6.6 million compared to the previous quarter.
The active vessel count was down by 715 vessels in the previous quarter, which allowed us to increase active utilization from 55% during the second quarter 20, 20% to 66% in the current quarter.
Average day rates for the region with $9643, an increase of 5% from where we were this time last year.
SLF racing lost to the area was $10.2 million for the quarter compared to an operating profit for the same period last year of $678000.
The decrease is due mainly to the drop off in revenues, coupled with the cost of mobilized vessels layout positions.
West Africa has been a struggle for everyone through 2020, as we come to terms with a pandemic, but as with the other regions in which we operate we are starting to see some early green shoots as our clients start to look to open back up.
Recruiting recovery will probably be a little slower than other areas, where we are fully committed and believe in the region going forward as shown by the 11 modern crew boats, which we use to improve and modernize our African fleet.
Last one from me and will delve into being tied a little over a month ago. So I'd just like to thank all the men and women in the company's work so hard to keep our vessels working in what has been a very challenging time. It has been extremely impressive to join this company and see that everyone has managed to achieve through such a difficult period.
Back to you Quintin. Thank you. Thank you Pearce great to have you here.
Our objective is to generate more cash by operating in fewer vessels at higher day rigs operate them at a lower operating cost per vessel and a lower unit cost per vessel for doing this while carefully minding the capital expenditure and working capital investments.
The company's free cash flow positive and our objective and compensation are all geared to keeping it that way.
And with that certainly we will open it up for questions.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one and you touched on the phone.
Today's speakers you may need to pick up the answer first fit for Preston the membranes. Once again, if you have your question. Please press Star then one.
And our first question comes from Patrick Fitzgerald from Baird.
Hi, guys. Thanks for taking the questions.
With respect to be.
Consent solicitation.
And then the tender and asset sales after.
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It seems it seems geared to.
Do something with the Troms offshore credit agreement.
And I'm just wondering what is the.
What would be the reasoning for that.
Taking that out.
So right now and allow me to say I'll have to defer to the consent tender documents in their entirety, because I'll give you a quick summary, please use those as the defining document.
Right now we have the ability to.
Repaid $35 million under the terms of that business.
Those.
The covenants in the terms of the business mirror or what is in the bonds right. So if we go for modifications in the bonds. We also have to go for modifications in the Troms debt otherwise, we don't really lower.
The covenant requirements or anything like that you forget two sets of near each other and they both have to be individually modified.
So in order to approach the troms lenders with those modifications, we need some flexibility in order to repay the troms debt similar to what's being paid on the bonds.
Okay, but the.
The rates on the Troms debt.
Is lower than the secured notes and they're due later right now.
It's not our objective to pay off lower coupon longer dated debt without modification, what our objective is to to get the ability to negotiate with the troms lenders to modify.
The covenants to the same way that we're modifying them in the bonds.
Okay, and the concern there would be.
Your you just don't know what 2021.
It's going to look like.
And if it's bad enough venue want that covenant flexibility.
In terms of the.
The interest coverage ratio is that steps up.
That's right.
Additionally, the second wave is hitting US now as we look into 21, we've got a good feel for what are the caseload is but the reality is there is a lot of uncertainty in the world today and so to get the modifications under the bonds is one thing, but it's also very important to get the same covenant modifications with the troms debt.
Gotcha, Okay. Thank you very much.
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In terms of.
M&A.
Obviously you you.
Got a good deal on non.
Some of those vessels.
And.
Recently, but is there anything bigger on the horizon either.
Peter you know.
In your expectation is for you guys or are for others in the industry.
Well for us for sure I can't speak to others in the industry and there is not enough.
Balance sheet capacity to do consolidation outside of Taiwan.
But we look at opportunities all the time, we continue to seek opportunities what I was looking for and consolidation is leveraging our existing economies of scale I am not looking to enter and adding more regions, but but I am looking for newer tonnage that we can bring into the fleet.
Average the fleet is.
Down in age and up and overall quality at the same time leverage.
In established onshore branch footprint.
This industry is highly fragmented so it's not an industry, where you can globally.
Dictate prices, while it's just there's not too much fragmentation in order to do that but you can get concentrated positions in certain areas and do better and so we look for ways to concentrate our existing locations and when we talk about the hermitage vessels that was a really nice complement to our existing footprint in Angola.
So so we're able to add 11 vessels, we wont add any head count or we can strengthen our position there and help them be defensive.
As the market is generally over supply.
To do the same in other areas.
We're not trying to emphasize Brazil at this point and generally have been pulling out of some specific regions in southeast Asia, Although we're still.
Very focused on tightly.
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Okay.
Yes, I am not going to ask you about that guidance.
Guidance for 21 in terms of you know cash revenue and cash.
Margins.
But.
In terms of.
Vessel sales and dry dock, what do you what does that look like for 21.
So let me give you just some indications, but we are not complete.
At least through the budgeting process for 2001 and this is just a lot of uncertainty in 21.
I expect that drive axle that I can keep them in the $15 million to $20 million range and 21.
And the reason I feel I can do that thats lower than I would say the run rate average would be for dry docks of a fleet of our size.
But the reason I think we can do that is that we did so many dry docks in.
18, 19 that we were kind of living off the iron as we would say we've got enough votes that have not paper look.
Legitimacy to working to see where the papers such that we can substitute vessels and work those vessels as opposed to doing dry docks on otherwise capable.
Capable vessels so.
So we can minimize trial after those levels is 21.
Continue to see us.
Shedding lower specification vessels and quite frankly, the specification bar continues to go up as the industry contracts, so as the industry contracts.
Vessels that were on a margin say six months ago are now in the sales categories. So you saw some vessels into that sale category.
Yes.
In early part of the 2020 and will make another assessment on that as we go into.
The Q1 period and probably a little later, when we really everything else about 21 on the Q1.
On the call with you in Q1 for Q4 Q4 earnings.
So in general.
I would expect a lower level of assets sales in 21, just because were burning through that marginal capacity.
My expectation is it will be in that.
$15 million to $20 million range as well.
Okay.
Last one for me.
Okay.
Go ahead.
Yeah, just just what.
And how much from Mexico would it be.
They have to pay you to get back to work on our normalized.
Payables, such Irene receivable situation.
14 million so the door behind what I would say is $14 million.
Okay. Thanks.
Yes.
And just a reminder, we have a question. Please press star one on your touch telecom.
Well, we have no further questions.
Yes.
Well certainly have thank you and everyone. We look forward to updating you again in February Goodbye.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.