Q4 2020 Tidewater Inc Earnings Call
Good morning, and welcome to the GW reports results for 12 months, ending 12 31 'twenty at this time my name is bread 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 Q&A session. If you have a question.
Please press star one and you touched on phone. Please note. This conference is being recorded and I will now turn it over to Jason Stanley Vice President <unk> and Investor Relations. You May go ahead Sir.
Thank you Brandon Good morning, everyone and welcome to Tidewater earnings Conference call for the three and 12 months ended December 31 2020.
I am joined on the call. This morning, with our President and CEO Quintin Kneen, Our Chief Accounting Officer, Sam Rubio General Counsel on corporate Secretary, Daniel Hudson, and our Vice President of sales and marketing peers meddlesome.
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 refer to our most recent 10-K for additional details on these factors. Please.
Documents available on our website at CDW dot com or through the SEC at SEC Gov.
Information presented on the call today speaks only as of today March five 2021, 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 Quintin.
Thank you Jason Good morning, everyone and welcome to the fourth quarter 2020, Tidewater earnings conference call on.
I'm pleased to say that this has been another solid quarter for Tidewater.
Hard to overstate the challenges we faced in 2020, but the worst of the pandemic driven downturn seems to be behind us.
Revenue surprises to the upside in the fourth quarter on the last call, we guided to 385 million per the year or $81 million for the fourth quarter and we came in at $397 million per the year or $92 million for the fourth quarter.
Historically and many of you already know that the fourth quarter is normally a tick down from the third quarter. It's due to weather in the North sea, but also due to calendar year budget exhaustion.
And incidentally the first quarter is the weakest calendar quarter likewise due to weather in the North Sea, but in addition to that some clients to the charter on a calendar year basis at the beginning of the year. So you get a bit of charter hire GAAP in the first of the year.
So the revenue surprise in the fourth quarter also resulted in the fourth quarter revenue being higher than the third quarter revenue, which is why I say it seems that the worst of the pandemic downturn is behind US also noteworthy in the fourth quarter was the incremental gross margin on the excess revenue.
Revenue was up $11 million from guidance on gross margin was up $10 million, that's on 90% incremental gross margin, which demonstrates extremely high operating leverage of our business. In this case, it's driven by higher than anticipated day rates and improve active utilization.
Our G&A costs continue to come down Thats now eight consecutive quarters of G&A run rate cost reductions our annualized G&A expense for the fourth quarter was 68 million. Just a reminder, the combined 2014 G&A for Tidewater and Gulfport Standalone was $253 million.
We've been beaten on G&A since the 2018 merger and we're not going to take our eyes off the ball, but in a moment I'm going to bring out some other elements of the business that we are more focused on in 2021.
When we last spoke on the third quarter call I walked you through our free cash flow guidance for the full year 2020, and I indicated free cash flow for the year would be $62 million. We came in at $53 million, even though our operational performance was noticeably better than what we guided the reason as many of you may have already jumped.
Is that more cash got hung up on working capital than we hoped I hinted to this on the last call, but a good customer of ours in Mexico has not been paying timely our balance with Pemex is approximately $18 million higher than ideal.
Not worried about the ultimate Collectability of the accounts do but it is annoying and it did throw us off our free cash flow generation goal for 2020.
Our dialog with them is opened in constant and based on that dialogue. We remain optimistic that we will get this balance normalized over the next five months.
We did receive a $5 million payment for them.
<unk>.
10 days ago.
Last quarter, we completed another bond consent and tender, we repurchased $50 million of bonds at 105% of par and eliminated the EBITDA covenant in Q2 through to 2022, and we also have loosened up the covenant definitions I have absolutely no concerns about our financial covenants.
We continue to evaluate the best options in the bank and debt capital markets with regards to refinancing the bond maturity in 2022, but we already have more cash today than the bond maturity balance and we fully intend to continue to be free cash flow positive about worried about the covenants and I'm not worried about the maturity.
Before I turn it over to Pierce to cover our consolidated quarterly results I'd first like to point out two ongoing transformation at Tidewater.
We mentioned in the press release last night and it was also covered in our press release by one of our vendors and Marseille, but I wanted to give you some more color on what's been going on behind the scenes here at Tidewater. So you can better understand how our shore base operating platform has become so scalable so stable and extremely cost efficient and on.
So how good this team is at transforming business processes in.
In the first 18 months after the 2018 merger, we had 12 different functional organizations that went through a complete overhaul. We now have a common ERP system throughout our organization, but more importantly, the global processes are all the same on the process as paperless it doesn't matter if you're in Dubai, Our Aberdeen or New Orleans, it's on.
All the same.
When all the processes are the same across the global organization and the processes Paperless you have maximum scale building and you have maximum redundancy you can literally do everything from anywhere.
That's what allows you to safely reduce shore based expenses and it's what's allowed us to add additional vessels without adding head count.
This team has created a digital enterprise in the shipping space.
During the pandemic, we continue our technological pushed by connecting our digital enterprise to the vessels at the time of the merger 70% of the vessels lacked advanced VSAT technology, Our alliance with Inmarsat helped us change that this last mile connectivity was challenging in the physical logistics logistical center you've got it.
After the vessels and by the end of 2020, we got there.
Now we have a global shipping enterprise with standardized consistent global practices and we havent backed on connecting all of the vessels. This allows the Iot the internet of things. This is where really gets exciting we can begin leveraging the localized technology on the vessels on getting real time data monitoring and we learned from cash.
Canvassing the data of the global fleet, the so called Big data benefit.
We benefit from global efficiency, but our customers benefit as well together, we can use the data to better manage carbon emissions for example, but Moreover across the board improvements in operating efficiency. We are beginning to raise the bar and by doing so reducing the commoditization of our service offering.
The other transformation, we are embracing us working with our customers to lower the carbon emissions from our vessels.
Many of you may find it surprising to know that the OSB industry has been working on improving its fuel operating efficiencies and consequently, reducing its carbon impact for our vessels for quite a long time quite frankly for us its been motivated largely by the self interest of becoming the low cost provider. As you may recall fuel is provided by our customers and therefore fuel.
<unk> is a key component.
And their vessel selection process, but it has also been motivated by customers in areas, such as Norway, which have been focused on carbon noxious on noise emissions since the early two thousands.
Our fleet has been operating on very low or ultra low sulfur fuel for much of the past decade, well ahead of IMO 2020 regulation, making this a requirement.
Particularly for Tidewater during our last Newbuild program, our fleet became one of the largest in the world to integrate the Siemens Blue drive intelligent.
Ocean management system.
<unk> on a significant reduction in fuel usage and greenhouse gas emissions, while at the same time cutting maintenance costs.
By investing in this technology. These vessels were also prepared for the future upgrades to utilize alternative energy sources, such as battery power.
To date several of our vessels have been converted to utilize hybrid propulsion, including the ability to operate on shore power when import all paid for by the customer through upfront lump sum payments or separately negotiated day rate increases.
Pleased to report that these upgrades completed in partnership with our customers have proven quite successful in reducing emissions throughout 2020 of these technologies.
<unk> emissions reductions of approximately 18% overall and over 60% while in port.
We are continuing to adjust our operations to take full advantage of this technology and we expect that we will see even better results over time.
We've talked about the integration on batteries as a hybrid power source, but I want to be clear that this does not mean that we feel this is the only long term or perhaps even in the best long term solution available. Our team is constantly evaluating other potential in emerging fuel options and enhancing.
Technologies that can further improve the operational efficiency and the performance of our vessels.
To achieve these emission reduction goals. These upgrades require material capital investments and while we are one of the few OSB companies with the financial strength to undertake these investments we resist doing so without our customers also demonstrating their commitment by paying upfront for these conversions, we're paying higher day rates.
For this technology.
As part of our broader mission of offering high quality profitable services to our customers while at the same time setting ourselves on a lower emissions path. We continue to high grade our fleet through disposing of vessels that don't align with these goals in evaluating assets for acquisition that would further this mission.
I'm excited about these two transformations and I look forward to keeping you updated on our progress.
Now after the pandemic broke on the on the first quarter call last year I begin to give you some very granular guidance on how I saw the business rolling through the turmoil and my objective was to get you comfortable that we would remain free cash flow positive through that difficult period and talk with you more in depth about where those cash flows were coming from.
And why for.
For 2021 allow me to step back again and be more general for 2021, I see it unfolding a bit like a reversal of the past 12 months.
Book earlier in the call that I was pleasantly surprised not only that the fourth quarter was better than we guided but that it was better than the third quarter.
Tendering activity in the second half of 2021 is quite robust tendering.
Tendering activity doesn't equate to demand, but it is a good indication that supply and demand will be tightening up over the next 12 months.
Generally I see us getting back to where we were in the first quarter of 2020 by the first quarter of 2002.
Last year I broke out for you the inefficiencies of the pandemic essentially trying to capture the cost of the pandemic.
We still have those efficiencies today due to pandemic protocols and restrictions, but it's become more part of our routine for reference these inefficiencies cost us approximately 5% of revenue.
But all in for 2021, I'm anticipating gross margin percentages of approximately 30%.
We anticipate G&A to be right at that $70 million Mark for the year dry dock, we anticipate to be approximately $20 million per the year on top of that we anticipate $8 million of miscellaneous capital expenditures for vessel upgrades, such as hybrid batteries and then some more development.
We have $34 million on the balance sheet and our assets held for sale category, which we intend to dispose of during the year, but of course it all depends on market conditions, and then I am anticipating a bit of correction in working capital as I mentioned earlier in the call.
The improvement is not going to be linear I do anticipate that it will be weighted to the second half of the year.
And with that let me turn the call over to peers for an overview of the Companys performance by region.
Thank you Quintin and good morning, everybody.
Before I talk about each of the regions I just wanted to make a couple of observations about 2020 on what we hope will happen in 2021.
Firstly.
Without saying that 2020 was an extremely tough year, but we saw an unprecedented drop in demand for our services.
But as our results showed our teams around the world still managed to deliver value and very trying circumstances, not just by winning work, but being disciplined in how we won that work.
Those vessel owners took what did not cover that debts are in all of your accepting a site that is equivalent to death by 1000 paper cuts and we'll just continue to extend out any hope of a market recovery.
Whilst we are cautiously more optimistic for the outlook in 2021 and beyond and frankly, it couldnt be much worse. This is still a very fragmented and challenged industry with too many players hanging on by their finger on.
Even if we start to see some incremental improvement in rates and utilization, we do not expect it to be the panacea that summer hoping for was a heel that terminal balance sheets. We believe of course that we are closer to that kind of share than most.
As we've commented on in previous earnings calls during 2020 on West Africa, and Europe, and Mediterranean fleets face the strongest headwinds throughout the year.
But still on a global basis active utilization across the whole fleet was only down 4%, 77% compared to the fourth quarter of 2019.
On the deepwater fee, specifically, we actually saw a 5% increase in utilization, which was reflected in our average day rates across the fleet being up approximately 8% to $10750 compared to the last quarter of 2019.
Globally, we had 32 fewer average active vessels working in the fourth quarter of 2020 than in the fourth quarter of 2019, but we had 12 more vessels active compared to the third quarter in 2020 and for the first time in 12 months on average stacked fleets in the fourth quarter was below 60 vessels.
Confirmation that our strategic commitment to careful management of the stack versus active fleet targeted vessel disposals flight to quality and commercial discipline is continuing to drive value for all our stakeholders.
Our Middle East Asia Pacific Region continued to see solid demand relative to the rest of the world with total utilization on average day rates, both up from the fourth quarter of 2019.
The active fleet decreased by one vessel from the previous quarter on.
On average rates in the region with $9002 per day compared to seven $746 per day in Q4 2019.
Vessel revenue for the quarter was down $1 6 million compared to Q4 2019.
Contributing to the areas operating loss for the year of $5 9 million.
Compared to a loss of $6 million for 2019.
We have start to see a pickup in inquiry levels for the region since the start of the year and subject to additional COVID-19 related delays, we expect to see some of that inquiry is starting to turn into firm contracts going into Q2 and Q3 of this year.
Yes.
To West Africa, where the region struggled throughout 2020.
Vessel revenues decreased by $12 4 million during the quarter compared to the previous quarter with a year end vessel operating loss of $27 5 million compared to on operating profit of $8 3 million in 2019.
The total fleet in the region was down five active vessels compared to Q4 2019.
We purchased 11 crew boats in the fourth quarter on the stacked fleet was down 15 vessels in Q3 2020, as we either recycled sold will started to reactivate a few vessels during Q4 2020.
Average day rates for the region were $8510 a decrease of 6% from where we were this time last year.
West Africa has been the hardest hit of all regions, but also could offer the most upside for companies like us with experience in vessels in the region towards the latter half of this year and going into 2022.
In the Europe, and Mediterranean region, all vessel average rates slightly improved from $12171 in Q4 2019 to $12368 per day in Q4 2020.
However vessel revenues per year decreased 32% or $40 1 million compared to 2019.
The lower revenue during the course of the year was driven by having 15 fewer active vessels in the region, which was caused by a drop in demand related to the pandemic.
Utilization for the active fleet for the quarter improved to over 90% compared to 86% per the same quarter last year.
Whilst the winter months on a historic quarter for the European market, we did see some stronger activity in the Norwegian sector in Q4, which has driven a tighter spot market in Q1 of this year and the North Sea area.
As hopeful we've also been re awarded some work in the Mediterranean region, which had been delayed from early 2020, and allowing us to reactivate two of our vessels from the stacked fleet.
We hope that this is further confirmation of better times ahead for the region.
Leaving the best until last the Americas region delivered a strong fourth quarter that included an operating profit of $1 $5 million on vessel operating profit for the year of $5 million.
<unk> on operating loss of 805000.
2019.
Despite seven fewer active vessels and lower revenue of $1 3 million compared to the same.
By year periods.
Utilization for the region was 86% slightly up from the same period in 2019 of 85%.
The region still faces challenges in 2021, but we have had some recent successes in Suriname on the Caribbean, which gives us some cause for optimism of further work to come.
As well as seeing an increased level of inquiries from the Ioc's in Mexico that should bolster activity in the region through the second half of the year.
Thank you and back over to Quentin.
Thank you Pearce.
Our objective as we've stated many times before is to generate more cash by operating in fewer vessels at higher day rates and to operate them at a lower operating cost per vessel and at a lower G&A cost per vessel.
We're doing this while carefully minding the capital expenditure and working capital investments.
These objectives are simply stated, but achieving them requires innovative technology agile change management and strong financial discipline.
The company is free cash flow positive in our objectives and compensation plans are all geared to keeping that going that way.
And with that Brandon, 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 one on your phone keypad.
You'd like to be removed from the queue. Please sales side with the hedge.
On a speakerphone please pick up your handset first before dialing once again if you have a question. Please press star one on your phone.
Net.
And from Baird, We have Patrick Fitzgerald. Please go ahead.
Hi, guys.
When did you give.
Gross margin guidance.
Hey, Patrick how are you 30%.
Okay.
And you are not giving any any revenue guidance right.
Well I would encourage you to see.
'twenty one is a reversal of 'twenty. So my expectation is that we're going to be just about level with where we were at last year, but his peers indicated and as I had some comments on him a little bullish on the second half of the year.
Well okay.
Okay.
So.
Kind of a broader question.
Day rates obviously.
Nice better fourth quarter than then.
You expected initially obviously the price of oil areas Cigna.
Significantly higher than that than it was.
A few months ago.
I mean.
What I guess, what big picture, what needs to happen to see a material increase in day rates.
Okay.
So.
If of course, it's always down to supply and demand balance right. Okay. So.
What you've got now is industry the industry as a whole recovering from the pandemic. So what happens in years like 2020 than we saw on the same thing happened in 2015.
As everybody pulls back on any type of maintenance that isn't just absolutely necessary. So it's not just the drilling activity pulls back which a lot of people talk to talk talk about but is it the maintenance level of activity pulls back substantially and if you think about the demand equation for our business right now it's running about 70%.
<unk>.
The boat activity as it related to just regular.
Maintenance of ongoing.
That form.
Production oriented activities.
And about 30% of those drilling activity.
To the extent that drilling comes back that would certainly tighten up demand much faster and therefore push day rates and push that supply and demand in balance into something that was more of a bolt on or safer.
But the two things that I'm really counting on as I look out to the rest of 'twenty and into 'twenty. Two is not really a pick up on drilling activity, but a resurgence of the maintenance activity that has been delayed and then just the continued attrition of vessels.
We haven't built a vessel in this industry in over six years and everybody's been real real.
Wilson and profit margin so vessels hasn't been reinvested in so we're starting to see vessels drop out of the supply chain.
Nicely.
On the dissipate the attrition in supply and the resurgence in demand mostly for maintenance activities are what's going to put us in balance by call. It the end of 'twenty one.
Yes.
Right.
Do you have like a.
Effective utilization.
Figure that you look at across the industry.
Where are we at.
And in terms of that.
Okay.
I'll tell you it's hard to tell because so many of the vessels that are on the roles today. So so many of the vessels that are in the.
The denominator of total vessels in the world are not really suitable for work. Okay. Let me give you some message on a second let me tell you why I think a lot of information out there is unreliable.
Theres a lot of vessels out there on the sidelines that have been idle since 2015 that haven't been maintained and theyre not really coming back to work. So they're in the denominator of a lot of the vessel accounts and ratios that you see in our industry, what I see today as utilization levels in the mid Seventy's range.
70% to 75% okay.
No.
The better companies and the better regions like for ourselves, we can push that easily into the high <unk> on low Ninety's alright, all depends on your vessel class, but also it depends on your particular dominance in the various regions and Thats. What you look forward you look for ways and the vessel class or within a particular geographic regions to get a little bit to get a bit more than that.
On the industry average.
Now.
If your question is also leading to okay. At what point do you really begin to get a day rate increases like when can you push price.
Would tell you that's probably closer to the 85% and it's not just 85% on the localized regions.
85 per cent and the localized and adjacent regions. Because you always have the ability of other vessels kind of saundra into your work.
On your work area and keep it keep rates down on.
Right, but it's ultimately a increase in demand for just the number of.
PSB.
Okay.
Alright, thank you.
Yes, yes.
Once again, if you do ask a question. Please don't star one standing by for any further questions.
Okay. It looks like no further questions at the moment on Quickbooks turn it back to you for closing remarks.
Thank you Brandon and thank you everyone and we will update you again in May.
Hi.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.