Q3 2023 Tidewater Inc Earnings Call
Yeah.
Thank you for standing by my name is Eric and I will be your conference operator today.
At this time I would like to welcome everyone to the Tidewater incorporated Q3, 2023 earnings calls.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
I'd like to withdraw your question Press Star one again thank.
Thank you.
And I'd like to turn the call over to West Gotcher, Vice President of Finance and Investor Relations. Please go ahead.
Thank you Eric Good morning, everyone and welcome to Tidewater as Q3 2023 earnings Conference call.
And on the call. This morning by our President and CEO Quintin Kneen, our Chief Financial Officer, Sam Rubio, and our Chief commercial officer peers Middleton.
During today's call, we'll make certain statements that are forward looking I'm, referring to our plans and expectations.
There are risks and uncertainties and other factors that may cause the company's actual performance to be materially different from that stated or implied by any comment that we were making during todays conference call.
Please refer to our most recent Form 10-K, and thank you for additional details on these factors.
These documents are available on our website at CDW dot com or through the SEC at SEC Gov.
Information presented on this call speaks only as of today November seven 2023.
Therefore, you're advised that any time sensitive information may no longer be accurate at the time of any replay.
Also during the call, we'll present, both GAAP and non-GAAP financial measures.
A reconciliation of GAAP to non-GAAP financial measures can be found on our website at T. D. W. Dot com.
It is included in yesterday's press release now with that I'll turn the call over to Glenn.
Thank you Wes good morning, everyone and welcome to the third quarter of 2020 free Tidewater earnings Conference call.
In my prepared remarks today I'm going to focus on our success in integrating the sole sub fleet discuss the share repurchase program that we announced yesterday and how that fits within our broader capital allocation framework and then provide some highlights of the third quarter and on our outlook for 2024.
Peter will give you more detail on the markets around the World and then Sam will explain the financials in more detail and provide some more specifics on the 2020 for guidance.
Quarters, and what's your interest rate a large acquisition are rarely as eloquent as one would prefer so another objective today is to provide you with some information that allows you to bridge the balance sheet and income statement movements, resulting from the acquisition.
We announced the completion of the 37 Sol staff vessel acquisitions. Shortly after the end of the second quarter. We are thrilled with the quality of the vessels in the more than 1000 personnel, who are now part of Tidewater.
We remain excited about what the addition of this high specification PSV fleet means for our shareholders over the coming years as the market continues to recover.
The team here put in a lot of work prior to the closing to ensure that Tidewater is regulatory administrative information technology systems were adequately stage, they're prepared to accept the vessels and that we were ready for the required customization and configurations to the onboard operational applications for the equipment on.
The newly acquired vessels.
Given that these vessels are all active the physical integration processes transitioned one vessel all the time and our schedule was designed to roll and vessels over time as they become naturally available to go through the roughly one and a half day change of management procedures.
As of today, we have completed 32 to 37 vessels through the whole change of management procedures and these vessels are fully integrated onto the tidewater administrative and technology infrastructure.
The scope encompasses the vessels fleet wide systems, and Onboarding vessels to Tidewater as HR crewing payroll financials purchasing everything AP customer billing.
We currently expect the remaining five vessels to be completed by the end of the month and I wanted to extend a special thank you to the Tidewater and wholesale teams as well as our third party providers, such as <unk> and Ocean Technologies group, we're all involved and dedicated to the successful integration.
This is an amazing global team accomplishment to successfully transition all 37 vessels within five months of their acquisition date.
The wholesale acquisition transaction was an asset purchase so atlanta itself to a more streamlined realization of G&A synergies as we didn't have to onboard any personnel not immediately pertinent to the supporting the newly acquired fleet.
Dynamic played out as expected and now that we have a substantial majority of the vessels inside of our infrastructure. We now expect the incremental annualized G&A for the new fleet to be about $3 5 million as compared to our initial view of $5 million, resulting in implied G&A synergies up $14 3 million and an incremental.
<unk> per day, G&A cost per vessel of $260 per day.
This is simply unmatched in our industry.
The company's debt agreements allow for the repurchase of up to 50% of the company's trailing 12 months net income beginning on November 17th 2023.
Accordingly, we announced in our press release that our board of directors has authorized the company to repurchase up to $35 million of our outstanding common stock, which is the maximum we can do at this time under those debt agreements, we will update the repurchase program quarterly based on our utilization of the program and the permitted amount available.
We are pleased to be in a position such that we are generating meaningful free cash flow and are able to institute a share repurchase program.
Given the long term outlook for the industry, we believe that the intrinsic value of our shares is well above the current trading value as such we view the share repurchase program is another investment option that we have to maximize value to our shareholders. In addition to value accretive acquisitions and the solid execution of our business.
Until we establish a long term debt capital structure that is better matched to a cyclical business, we will limit our repurchases to the maximum of what is allowed under our debt agreements, which is currently $35 million or to the anticipated net cash position six quarters out.
Value accretive acquisitions remain our first priority on capital allocation.
It's difficult to predict if or when any value for your deals can be completed, but we will balance the share repurchase opportunity with the opportunities from acquisitions.
Our philosophy will be to evaluate the return on any given acquisition to the return on share repurchases based on our view of the intrinsic value of the business.
The positive momentum in the offshore vessel market continued during the third quarter Tidewater continued to benefit from the global uplift in day rates driven by the increasing demand for vessels and tight vessel supply with day rates up over $800 per day, an 11% movement from the last quarter. This is the large.
Absolute and percentage sequentially quarterly day rate increase since the recovery began.
The average day rate is up now approximately $7200 per day or nearly 70% since the recovery began around the end of 2021.
Every region in every vessel class experienced a modest a quite significant day rate increases during the third quarter, which speaks to the global tightness in vessel supply driving day rates for every vessel class.
The global uplift in our day rates is comprised of two major factors. The first of which is older contracts rolling off on re contracting that prevailing market rates, allowing us to continue to mark to market. Our fleet. The second factor is that leading edge term contracts continued to move meaningfully higher.
During the quarter, we executed 27 term contracts with an average rate of approximately $28600 per day with a new contract distribution essentially in line with our vessel distribution this compared to the leading edge day rate in Q2 of approximately 23500 per day. This represents a nearly 22%.
Sequential increase in leading edge term day rates essentially double the rate of sequential growth from Q1 to Q2 <unk>.
Further the Q3, leading edge term contract day rate was approximately 60% higher than the Q3 printed day rate.
There's always a trade off between utilization and day rate. When you are holding out for the best prices in this quarter. It more than worked out we're still contracting short with the average duration of new contracts in the third quarter was approximately 10 months slightly higher than the $6 five months in the second quarter. The uptick in duration is attributable to a few long term contracts.
Some of our smaller tonnage and lower specification vessel markets.
As we have talked about in the past there is an iterative process as day rates reset.
We're one low class moves up as the day rates increased customers will begin to look to find adequate substitutes in the adjacent vessel classes, where appropriate for the given work scope as day rates in the smaller vessel classes approach parity with larger vessels larger vessels have taken the next leg up we saw that dynamic play out this quarter where the.
Relative day rate improvement came from the mid and small vessel classes. We are encouraged by this dynamic is it's the natural progression of day rates across the vessel spectrum in a supply constrained environment, we anticipate that as we enter the more active tendering part of the calendar in the first quarter that we will continue to see day rate momentum in all of our vessels.
<unk>.
For the third quarter revenue increased 39% to $299 million compared to $201 million in the second quarter and ahead of the Q3 revenue guidance. We provided on last quarter's call. The revenue growth was driven by the vessels acquired from Sol staff, but also by higher than anticipated day rates on a nice expansion in utilization.
Up over two 5% sequentially.
The 82, 1%.
Utilization was below the expectation of 84% we laid out in the last quarter's call due to more time down for repairs than we had estimated.
Gross margin was up 1%, excluding the $4 million of one time charges associated with the sole start integration, we were pushing to be up five percentage points, but the additional time down for repair decreased revenue and increased cost the 2% of excess downtime this quarter cost us $6 million in revenue and 6 million cost, which would have been another 3%.
<unk> points of gross margin.
It's not uncommon for vessels to experience higher downtime as newly reactivated vessels return to high service intensity. After a period of low to mid level of intensity, but our recent experience has been higher than we anticipated.
As we look forward to the fourth quarter, we expect revenue to increase to $309 million. The sequential revenue increase was 95% covered by existing backlog with the remaining 5% anticipated to be picked up on spot work throughout the quarter.
The guidance reflects 84% utilization the risk to this guidance as unanticipated downtime and unanticipated weakness in the spot market.
Sam will give you more details on our 2024 guidance, but our initial revenue guidance for 2024 reflects a year over year average day rate increase of over $4000 in excess of the day rate increases we saw throughout 2022, and 2023 and well above the prior cycle annual increases of $500 per day.
In summary, we are very pleased with the continued momentum across our business with revenue margins day rates and utilization all continuing to move up we are particularly pleased with the day rate progression across all of our regions and vessel classes and the integration of the newly acquired <unk> vessels.
We remain highly confident that secular themes of the global shortage of vessels combined with increasing demand from a variety of demand drivers, including drilling subsea construction existing production and offshore wind will continue to drive vessel owners with the ability to push up day rates and improved contractual terms as we go through 2020.
Four and beyond.
And with that let me turn the call over to peers for an overview of the geographic markets around the world and more color on the performance of individual vessel classes.
Thank you Quintin and good morning, everyone.
When I talk about each of our regions performance I will give a quick update on our perspective of the overall market and touch on a couple of themes. We continue to focus on that we believe are important to maintain the long term growth company.
The outlook for the sector remains positive with market positivity being driven by the continued upturn in projects investment.
<unk> energy price environment firm demand and ongoing constraints and fleet supply the demand momentum and expect to build further into 2020 for 2025.
None of the regions in which we operate are seeing any signs of slowdown at the present time.
Rig rates and demand continued to improve with Clarkson research reported that demands as fund by an additional 3%. So far this year driven by continued improvements in the middle East.
The number of active Jackups rose to 158 units in the middle East up by 37% since the start of 2022.
And demand is expected to increase by further 10 rigs by the end of 2024, just in the Middle East.
In addition, the <unk> sector remains very positive with a total of 15, new build and conversion contracts projected to be awarded in 2023, driven primarily by strong activity in South America with a further 17 newbuild in conversion mode. Two contracts expected to be awarded in 2024 totaling an estimated $16 billion of contract investment.
In 2024, which is close to the record high seen in this sector in 2022.
All very positive indicators for the long term health of the OSV space.
On previous calls we've been very clear about focusing on certain key tenants as the market.
<unk> to enable us to maintain a long term growth of the company chose those tenants revolved around discipline on how and what we bid for and the flight to quality of our fleet composition.
With the <unk> acquisition complete in Q3, we continue to focus on the flight to quality of the fleet and we now have a total of 220 ships in the Tidewater fleet of which a 197 seas and 65% or 127, osce's, including all of the 37 <unk> a high specification.
Larger day PSC.
The 16000 BHP on Kansas.
These high specification vessels with the class of base and are primarily driving charter rates in the global market. Today. So. The addition of 37 large tag high specification <unk> has further enhanced our ability to leverage not just OSB rates globally, but also contract terms to support the long term growth of the business.
Discipline is another key tenant and whilst a lot of our focus since the recovery began at the end of 2021 has been on pushing up day rates. We've also been very focused on getting our charterers degrees more actual contracts that either remove the termination for convenience closed completely will significantly improve the termination provisions.
Whilst tidewater is very focused on this issue as we agreed to new contracts, we believe that the industry must be equally as discipline regarding termination revisions to help build a long term sustainable growth industry again.
So overall, we remain very positive for the long term health of the market and with discipline and a high quality fleet. We have as mentioned by Clinton earlier being able to move our fee constant day rate up by over $800 per day compared to the prior quarter.
Over $7200 per day since the recovery began at the end of 2021.
Very positive momentum, we believe not just for tidewater, but for the whole industry.
Working through our various regions and starting with Europe, where we saw the biggest impact from the <unk> acquisition, we saw strong demand for PSV in Norway U K and the net.
However, the large HTS market in the UK North Sea was slightly softer in Q3 than expected with average rates for our two large HTS is in the region dropping from $36913 per day in Q2 to $31048 in Q3.
However, even with the relative sluggishness in the HTS sector. The teams did improved outcomes at fee rates compared to Q2 2023 from $18990 per day.
$19105 per day across the whole region.
Moving to Africa, we continue to see rising demand across the whole continent and in Q3 2023, the constant fleet rates improved by $1303 per day.
From $14469 per day in Q2, 2023 up to $15772 per day with most of the day rate improvement in the quarter coming from our 816000, BHP Clos HTS and plus 900 square meter class PSV.
With the 8% to 16000 BHP class HTS is we had a couple of boat boats roll off old legacy contracts and into new contracts with leading edge day rates in excess of $20000 per day levels.
In the Middle East, our most challenging region competition wise the team managed to still push rates and increased our total constant feet right.
$10449 per day in Q2, 2023 to $10554 per day in Q3 2023.
The middle East traditionally has always recovered slowed in other areas because of a combination of challenging competition, but also the nature of the region to have longer term contracts. So it takes time to roll vessels onto new Mark to market day rates. However, it remains a key area of focus for the fleet due to the consistent long term utilization, we can achieve in the region some of our smaller class.
As the vessels.
In the Americas, we've seen a lot of demand in Brazil throughout the year from Petrobras with NFC reported come to the market again for another 20 large PSV tender to commence in 2020 full which added onto the contracts already awarded in 2023 will only help to tighten the global supply of large PSV is going into 2024.
In Q3, 2023 acres fleet continued to perform strongly with our team able to push composite feet rates by $3226 per day from $20269 per day in Q2, 2023 up to $23495 per day in Q3 2020.
Three.
Most of the uptick in rates coming from the Psc's.
Leading edge 10 day rates achieving in excess of $40000 per day in the region during the quarter.
We also signed several new contracts in the region with no termination for convenience clauses with various oil majors.
Lastly in Asia Pacific in Q3, 2023, the Asia Pacific team continued to sustain impressive rates across the region and increased at constant rates in the region by $1617 per day from $24250 per day in Q2, 2023 up <unk> 25.
<unk> thousand $867 per day in Q3 2023.
Worth noting in this region to one day rate momentum has been robust over the course of the year quarter to quarter, we do see some rate movements. When we moved vessels in and out of work in Australia will Taiwan, which tend to be high day rates and higher opex areas compared to other countries in the region. So during the quarter. We did see a day rate dropped in the smaller class of PSC.
Some vessels finish walking into wind farm summer season in Taiwan and moves under contracts and other areas in Asia. However, overall day rates in the region were up by six 7% all in all a very impressive performance in the Asia Pac team.
Overall, we are very pleased with how the market has continued to improve in Q3, not just with significant day rate improvement over the quarter, but also with the success that our teams are achieving pushing more external contract terms and onto our customers.
With that I'll hand, it over to Sam Thank you.
Thank you Paris and good morning, everyone. At this time as in prior quarters I would like to take you through our financial results I will focus primarily on a quarter to quarter results of the third quarter of 2023 compared to the second quarter of 2023.
The third quarter results were impacted by two significant events on July 15, we completed the acquisition of the 37 platform supply vessels from Sul stack for $594 million.
We financed the acquisition through a combination of net proceeds from a $250 million five year 10, and three eights fixed rate unsecured Nordic bond and used $325 million three year, so for linked floating rate amortizing senior.
Our secured senior bank term loan together with $18 $5 million of cash.
More details of the financing are available in our recent 10-Q filed yesterday.
In addition, the steep increase in the value of our common stock in July.
<unk> and previously out of the money warrants become exercisable prior to the expert exploration on July 31 23.
This resulted in about $1 9 million shares of stock issued for a total of 111 5 million.
As noted in our press release filed yesterday, we reported net income of $26 2 million for the third quarter or $49 49 per share on revenue of $299 3 million.
Compared to $22 6 million of net income or <unk> 43 per share in the second quarter on $215 million in revenue.
In the quarter the acquisition of this whole set vessels played a big role in the increase in revenue.
Active utilization also increase which contributed to the increase in revenue active utilization increased from 79, 4% in Q2 to 82, 1% in the current quarter.
Utilization increase was driven by higher utilization of the sole stacked vessels lower lower mobilization days, offset somewhat but slightly higher drydock and down for repair days.
Also contributing to the increase in revenue was an increase in average day rates, which increased by 11, 4% from $16 42 per day in the second quarter to 17, $8 65 per day in the third quarter.
This margin in Q3 was $132 7 million compared to $92 1 million in Q2, while vessel margin percentage increased to 44, 7% in Q3 from 43, 8% in Q2.
Adjusted EBITDA was $117 2 million in Q3 compared to $72 million in Q2.
That's all operating costs for the quarter were $164 2 million in Q3 compared to $118 3 million in Q2, the full stack vessels contributed $35 million to the increase.
In the quarter, we did see an increase in days down for repair and idle time as vessels move to new contracts, which added approximately 6 million of unplanned cost and we also incurred an additional $4 million and incremental costs associated with the soles that integration.
In the quarter, we sold three non core vessels one from our assets held for sale to from our active fleet for net proceeds of 945000.
We recorded a net gain of 863000 on the sale of these vessels.
We generated operating income of $55 7 million for the third quarter of 2003 compared to $38 9 million in Q2. The increase is due primarily to the higher revenue.
As we look to Q4, we now estimate total revenues to be approximately $309 million and a gross margin of 47%.
The 'twenty 'twenty four we are now projecting our revenues to be between one four and $1 $45 billion and a gross margin of 52%.
G&A costs for the quarter was $21 million, which was lower than last quarter Q2 included $2 4 million in bad debt expense related to a customer's receivable balance that we determined it was uncollectible. In addition, we also incurred $1 2 million and transaction expenses related to the sole stacked vessel acquisition.
We expect our total G&A costs for 2023 to be approximately $95 million, which includes approximately $6 2 million of transaction costs related to the <unk> vessel acquisition $1 7 million of bad debt expense of $9 6 million in noncash equity compensation.
Excluding the items, our overall G&A costs for 2023 will be approximately $87 1 million and our cash G&A cost to be approximately $85 4 million.
Over the years, we've done extremely well in maintaining a very low industry, leading G&A costs for <unk> de.
Our cost per day for 2023 will be about 3500 per day.
We see that number marginally increasing in 2024 to about $13 55 per day.
The amortization IRA equity based stock compensation related to the performance of our stock will grow year over year due to due to a substantial increase in our stock price.
The 2024, we project, our noncash equity compensation to be $13 million and our cash G&A cost to be about $93 million, which includes $3 5 million related to the <unk> acquisition.
In the quarter, we incurred $20 6 million in deferred drydock cost compared to $21 4 million in Q2.
Dakota wins in the quarter, we incurred 880, drydock days, which affect that utilization by four percentage points. In Q4, we will be pulling forward a couple of dry docks that were projected to be done in 2024 to take advantage of the idle time before they start in your contracts.
With that change we now estimate our guide our costs for the full year 2023 to be about $91 million.
In Q3, we also incurred $5 7 million in capital expenditures related to infrastructure upgrades and vessel modifications.
For the full year 2003, we expect to incur approximately $28 million in capital expenditures and 5 million of which has been reimbursed by our customers.
2024 will be another heavy drydock year as we incorporate the sole stacked vessels into our system.
We project, our Drydock expense for 2024 to be approximately $125 million, including carryover costs from 2023 ongoing projects.
In addition for 2024, we anticipate capital expenditures to be about $23 million.
We generated $29 1 million of free cash flow this quarter.
We did see an increase in working capital investment, primarily because of the sulfate acquisition, which lowered our free cash flow for the quarter by about $30 million.
Our investment in working capital May grow marginally as revenue increases, but we will continue to manage this capital investment as tightly as we do our other capital expenditures.
We expect the cash flow performance to improve in Q4 as our business continues to improve but we do not anticipate such a large increase in accounts receivable related to solve that and both drydock and capital expenditures are expected to be lower than in Q3.
In Q4 of 2019, we began reclassifying vessels on our balance sheet from property and equipment to assets held for sale and at the end of Q3 'twenty. Three we had one vessel remaining in assets held for sale at the value of 565000. This vessel was sold in Q4 for $1 million.
I would now like to focus on the performance of the regions, Our Americas region reported operating profit of $12 6 million.
For the quarter compared to an operating profit of $6 2 million in Q2.
Vessel operating margin decreased from 41, 2% in Q2 to 38, 9% in the current quarter.
The region reported revenue of $70 7 million in Q3 compared to $50 4 million in Q2.
The region operate at 37 active vessels in the quarter, an increase of five vessels from Q2 vessel increase is due to the addition of the sole stacked vessels to the region.
Active utilization for the quarter was 86, 3% higher than than the $85. Four in Q2 day rates increased 15, 9% to $23 $4 95 in Q3 from $22 69 per day in Q2.
The increase in operating income was due primarily to increased revenue from the sulphide vessels and lower bad debt expense. This is offset somewhat by increased operating costs also due to the addition of the sole stacked vessels.
For the third quarter, the Asia Pacific Region reported an operating profit of $14 6 million compared to an operating profit of $7 million in Q2.
Operating margin increased from 47% in Q2 to 51, 7% in Q3.
The region reported revenue of $39 million in the third quarter compared to $22 6 million in the prior quarter.
<unk> operated 18 active vessels, which was up four vessels on average compared to Q2.
The increase in vessels was attributed to the <unk> acquisition.
Active utilization increased to $91 3 million in the quarter compared to 72, 4% in Q2.
Day rates also increased by six 7% from 24000 per day in Q2 compared to 25000 <unk> seven per day in Q3.
The higher operating income is due to the increase in revenue, resulting from the higher day rates or utilization and the addition of this whole set vessels.
For the third quarter in the Middle East region reported operating loss of $1 1 million compared to an operating loss of $1 7 million in Q2.
Operating margin decreased marginally from 2018, 7% to 22%.
The region reported revenue of $34 7 million in the third quarter compared to $31 9 million in the prior quarter.
The region operate at 45 vessels and increase of one vessel from Q2.
Active utilization increased from 76% in the second quarter to 79, 8% in Q3.
Day rates increased from $10004 49 per day in Q2 to $10 $5 44 per day in Q3.
Improvement in operating results was due primarily to the increase in revenue coupled with slightly lower G&A expense.
Our Europe and Mediterranean region reported operating profit of $9 6 million in Q3, an increase from Q2, where the region reported operating profit of $8 3 million.
Vessel operating margin increased from 45, 8% to 46, 7%.
Revenue doubled to 70, $978 9 million in Q3 compared to $39 3 million in Q2.
The region operated 50 vessels in the quarter 24, more than Q2, which was attributed to the <unk> acquisition.
Active utilization increased to 88, 8% compared to 85, 7% in Q2.
The increase in utilization was primarily due to the sole stacked vessels operated at high utilization rate. In addition day rates increased to 19105 per day compared to 18990 per day in Q2.
The increase in operating income for the quarter was mainly driven by the increase in revenue from this all set vessels offset by higher operating costs encountered as part of the full stacked vessel integration.
Our West Africa region reported operating profit of $28 4 million in Q3 compared to operating profit of $25 5 million in Q2.
Vessel operating margin increased from 50 353, 6% to 55, 1%. The result in this region.
The results in this region continue to improve as the demand in the market remains very strong.
Revenue for Q3 was $73 7 million compared to $66 2 million in Q2. The region operated at 69 vessels on average in Q3 four more than in Q2, three of which were cell stack vessels added to the area.
Active utilization decreased to 73, 9% in Q3 from 77, 8% in Q2.
Several vessel vessels encourage some frictional unemployment as it came off contract and began new contracts.
Day rates continue to increase as we saw a 9% increase to 15 772 per day in Q3, the increase in operating income from <unk> was mainly from the higher revenue.
In summary, we are pleased with our Q3 results the quarter was impacted by numerous items, we repositioned for vessels to different regions and higher than anticipated idle time due to higher dry docks and higher repair days.
And we integrated a large percentage of the 37 vessels, we purchased from Tulsa.
We plan to have all the vessels integrated by the end of this month.
We're now in a stronger position to accelerate the growth of the company. We are adjusting some of our expectations, but overall expect the fleet, we will continue to excel and.
In the challenging wrap up ramp up in activity that we expect over the next few years, we remain very encouraged by the leading indicators we continue to see.
We are pleased to continue to continued increases in revenues throughout the year, driven by our acquisitions and a higher day rates.
Very excited to see how 2024 is developing.
With that I'll turn it back over to Glenn.
Thank you Sam Eric.
Eric We're just going to go ahead and open it up for questions.
Okay.
Okay, great. Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.
Good morning, gentlemen.
Good morning.
Quintin on the cost side of things, obviously, you mentioned a few different things went up sequentially because of sulfur that addition, but part of it was the vessel downtime and costs associated with that.
Just trying to frame up maybe how to think about your cost kind of on a per day basis.
As we move forward into a rising rate environment rising utilization environment.
Does this start to normalize at these kind of levels or do you think once you get through that kind of rush back to work on a steady basis that things will eventually come down somewhat on a per day basis or just I know, it's embedded in margin guidance, but trying to think about that as we go through the next several quarters and a much higher rate environment.
<unk>.
Brian. Thanks, So there's a couple of things unique to the quarter as it relates to the integration of Solta right. So one was there just naturally higher cost vessels. So the average moves up a little bit the baseline moves up just because those vessels are larger vessels and they operate in more expensive areas around the world.
Like Brazil, and Australia, as well as the North Sea.
Then we had some one time costs associated with just going through the process of the integration that I was alluding to earlier and I think that was about $4 million in total.
And then the unknown was we had about $6 million of costs related to vessels that went down for repair that we werent anticipating and I attribute that to just teething issues related to.
Reactivate the entire fleet back in 2022.
So so right now we're in a great position, where we can push costs through to our customers and so that's the upside here is as the cost.
Space changes, we're able to push it through to our customers, we're trying to push it through as fast as possible I don't think youre not going to see the economies of scale on the per boat basis that we see on the G&A basis naturally.
So I think that.
Embedded in the 'twenty four guidance on inflation is about.
Yeah.
6% that gets us to about $8500 per day.
That will eventually.
Just move with a general price level movements.
But my hope is that at the end of the day. This is all about improving margins and then we can push all of that through to our customers as we go through 'twenty four.
Right and so if we think about what you just said in relation to the 52% kind of gross margin guidance I presume that gradually across the year as rates are moving up.
Or not necessarily moving up in proportion so that 52% of the average for the year, but your quarterly run rates going to be expanding as the year goes on does that generally we don't know absolutely yes, yes.
My Hope is that there is also a disproportionate pushup in day rates because quite frankly, we are still not earning our cost of capital. So I'm pushing up day rates just to get my cost of capital and I'm layering on top of that any any cost basis.
Changes as a result of the cost structure.
Perfect that's exactly what I thought okay, and then just one follow up on the duration side of things you guys have obviously been purposely keeping duration relatively short because we are in a rising rate environment. I think you mentioned 10 months. This quarter was six and a half I think it was seven or eight in a quarter before that at.
At what level of of rates or margins or returns on capital do you start to think about locking some things up on a little bit longer term basis.
Well you know I.
I am so optimistic right now of the business that I don't want to lock up but I know that there is a prudent level of going long and short on your fleet.
But any business.
Should address.
But to me, it's really based on the outlook.
Can you see the supply and demand factors. So so strongly in the vessel owners favors that I don't want to go and.
On the lower end to it.
These longer term contracts that we locked up in Q3, they were like lower specification Tom is there any mechanism.
220 vessels and other vessels the greatest vessel overbuilt and so on the lower side of the specification spectrum I don't mind locking those up a little bit longer and that's what I did in mid Q3.
There certainly is a point longer in the cycle, where you start locking up because of just prudency because of.
Cycle perceptions change.
Michael So forth I, just don't see that in the foreseeable future.
Perfect and I feel like that's going to be next year for sure.
Yes. Thank you.
Thank you.
Next question comes from the line of Greg <unk> with BTG. Please go ahead.
Hey, guys good morning, and thank you.
Yeah.
A question for you.
Realizing this was a.
<unk> integration.
Quintin any kind of rough guidance, you can give us around as we're looking at the larger PSV segments.
Maybe where.
The salt that fleet may be kept kept a lid on pricing in terms of reported day rates versus maybe where it was additives if at all.
Yes, no there is definitely a mix.
Really in contracts that we inherited were.
Definitely below Mark now we price it accordingly, but they were below market so when they roll off.
And the next year.
In a year and a half.
That should reprice quite nicely.
And then generally in the North sea market it's been.
A fairly fixed half of it's going to roll over by the end of 'twenty four.
Okay and then.
I did have a question around that you'd get you called out the $6 million of kind of unplanned.
Costs during the quarter was that related to a few vessels or a few a handful of vessels where we're at.
Reactivating them previously they had to come back in and any kind of color around that and how yes.
Seven in total and I think most of them more in the middle East this quarter, although they are somewhat spread out like we had one in Brazil as well.
No.
Unfortunately, when you put about the work you do everything you think you need to do to make sure. The boat is.
As.
A sound, but when the equipment hasn't worked in a while.
And you just never know what valves are going to break or what piece of moving.
Equipment.
No longer moves when it showed itself so it hasnt teething issues that we're working through it as it is temporary and you go through this and I think we probably have another three or four months of it.
Our budgeted into the guidance that we put into the Q4 and into 'twenty four but my hope is that you know.
We will be able to improve upon that even sooner than that.
Okay, Great and then just one final one for me as we think about the fleet the contracted fleet.
I guess we're work.
We're in the middle of Q4 are there any are there any kind of pressure points in terms of.
The seasonality of the market, where we should expect an outsized number of contract resets in any specific quarter as we look out over the next 12 months.
Well generally Q1, and we see most of the resetting occurred because there's still a lot of companies the contract on a calendar year basis.
So you might see more in Q1 as we go through it but.
So let me hand, it over to Peter.
Are you seeing any changes in the seasonality patterns over time.
No no not that.
We haven't seen the cost when you get in the North Sea, obviously comes through the summer season. So there's always a Q1 play.
And a little bit as I said earlier.
How about Kate in the Asia Pacific, where we pick up quite a bit of work in Taiwan.
So Q to Q Q1, Q2 start stone as well, but.
No there is not a particularly seasonality it's.
More of a Q1.
What I will say a lot of the contracts coming coming through for next year.
Perfect. Thank you very much thanks.
Thanks, Rick.
Thank you at this time there are no further questions I will now turn the call back over to Quintin Kneen for closing remarks. Please go ahead.
Thank you Eric and thank you everyone for listening and we look forward to updating you again in March Goodbye.
Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect your lines.
Okay.
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