Q2 2019 Earnings Call
Second quarter 20 next year.
My name is Dave trend and I'll be your operator for today's call at this time, all participants I know listen only mode. Later, we'll conduct a question answer session.
Kinda question answer session. If you have a question. Please press Star then one on your Touchtone phone. Please note.
Call is being recorded I'll now turn the call over and that that Chesky not maciejewski you may begin.
Thank you Adrian good morning, everyone and welcome to time Warner's <unk> earnings Conference call for the period ended June Thirtyth 2019, I Batman Chesapeake Tidewater as Vice President of Investor Relations and corporate development like to thank you for your time and interest in Tidewater with me. This morning on the call are our president and CEO . John ran quit mean, our Chief Financial Officer, Jeff Gorski, Our Chief operating officer, and Bruce ones from our General Counsel.
For today's call agenda I'll cover a few formalities and then turn the call over to Jon for his prepared remarks, all my questions review of our financial results for the period. Following John's closing comments, we will then open up the call for questions.
During today's conference call, we may make certain comments that are forward looking and not statements of historical fact.
These are there are risks and 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 Form 10-Q for additional details on the risk. These risk factors. This document is available on our website or through the FCC at SCC Dot Gov information presented on this call speaks only as of today August 13, 2019, and 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 will present, both GAAP and non-GAAP financial measures. The reconciliation of GAAP to non-GAAP measures is included in our last evenings.
A press release with that I will turn the call over to John .
Okay.
Good morning, everyone and welcome to the Tidewater earnings call. The second quarter was a testament to the strategic rationale the Gulfmark combination completed towards the end of last year.
As demonstrated by the margin growth of the combined company, the north sea market and deepwater vessels more broadly both segments that were enhanced through the acquisition showed continued strengthening during the quarter.
In addition, the increased scale out for good cost control, both on and offshore.
Resulting in margin expansion relative to both prior quarter and the same time last year.
While the seasonal north sea market strengthen earlier than anticipated and assess moderate moderated to more normalized levels for this time of year.
We believe the continued trend of activity levels, which impacts rates and utilization are moving in the right direction.
Albeit at a pace that is lower than desired.
Revenue was up slightly over the prior quarter due to average day rate increase of $636 per day.
An active utilization falling by 1.3 percentage points.
This is the second consecutive quarter worldwide average day rates have increased after having consistently declined since the onset of the downturn in 2014.
The utilization decline is largely attributed having 784 active days out of service due to dry docks and Reactivations an increase of 394 days over the first quarter. This difference of 394 days amounts to approximately 2.6 percentage points and active utilization drag relative to the first quarter, resulting in active utilization that is otherwise slightly ahead of the first quarter, but for the additional dockings.
We continue to highlight the significant dry dock obligations for ourselves and the industry as a whole.
Where we estimate that approximately 450 currently active LSB. However will come due in 2019 for special survey and another approximate 425 will be due in 2020.
We are not immune to this impact and will continue to experience elevated dry docking cost and downtime as we position our fleet to meet our customers' global demand.
Excluding vessels that are currently stacked and anticipated debris reactivated.
We anticipate a thousand 25.
And 300 vessel days out of service due to dry docks in the third and fourth quarters, respectively.
These estimates may move between quarters based on our customers' needs.
That represents our current.
Best estimate however in spite of the elevated drydock schedule, we're committed to being disciplined with our capital and we are only reactivate or maintain active vessels against contract coverage, whose projected margins provide a full payout with a reasonable return on our investment.
Overall this may result in near term cash outlays as we invest in vessels dockings.
However, the overall cash on cash returns and long term strategic positioning of these assets.
We will be meaningful to our shareholders.
As an example, we have recently authorized direct device it has two deepwater PSV.
Against multi year contracts and are currently in discussion with a separate customer to reactivate a third deepwater PSV.
Whereby they pre fund a significant portion of the dry dock, which will be earned out over the firm term. In addition to an above market average vessel operating margin.
These are vessels that were previously projected to be stacked.
But the returns warranted the investment.
To further illustrate as part of our disciplined approach to investing and vessels that will best serve our customers and ultimately our shareholders.
In excess of 85% of these vessels that we are projected for dry dock this year.
We have a term contract.
And for the remaining 15% we may elect to have those vessels back until adequate visible contract coverage is realized.
Our continued focus on high grading the fleet to maximize overall cash generation.
As opposed to operating a large fleet as a prime objective will result in us aggressively moving vessels from active service.
In response may dispose of vessels that no longer meet our return objectives.
As a result, it is likely that our active vessel count will continue to trend down throughout the remainder of the year.
As lower specification vessel contract coverage winds down.
Whereas we reposition vessels to more strategically important markets.
Further it is worth noting that our disciplined fleet management is best evidenced by the fact that we are approaching almost 80 vessels sold since the start of 2018.
This disposable lower specification vessels as we simultaneously acquire high specification vessels like many of the Gulfmark vessels and the two vessels we acquired in fourth quarter 2018 will continue to yield EXL outcomes for our stakeholders.
We firmly believe that a smaller active fleet with the most commercial options in our primary markets, where we can benefit from scale is more valuable than either a larger active vessel count with lower margin or the absolute number of countries in which we operate.
To briefly highlight our operating segments. The Americas region had margin expansion in both dollar in percentage terms, resulting from improved day rates offset by active utilization declines that is largely attributed drydockings.
And good operating cost control.
Cost reduction part resulted from onetime favorable adjustment to insurance reserves and reductions associated with disposal stacked vessels that resulted in lower spec calls.
For the Middle East and Asia Pac region revenue was flat with the prior quarter with operating quite cost slightly higher though about equivalent with the first quarter when accounting for the extra day available in the quarter.
Slightly elevated dry dock off hire was offset by small improvements in average day rates.
Which were more reflective vessel mix no material change in rate progression.
As previously noted the results for the European Mediterranean Sea region saw significant benefits from a seasonally strong north sea market.
The $6.5 million or 23% increase in revenue from the first quarter.
Yielded an improvement in vessel operating profit of 6.1 million from the prior quarter.
The 95% vessel operating profit conversion rate.
He is a testament to the operating leverage and economies of scale embedded in Tidewater business.
Lastly, the West Africa region was the weakest relative to first quarter with vessel operating margins declining almost 10 percentage points.
As revenue decreased and operating cost increased.
This is a dribble to higher maintenance cost and associated downtime as we ensure vessels are operationally fit for our customers.
As the well of stacking of four vessels during the quarter that came off contract or came due for a special survey without immediately visible opportunities to justify the investment in the special survey.
As we projected second half of 2019, we anticipate the average active vessel count to drop by a level 11 vessels in the third quarter.
And another six vessels in the fourth quarter.
As we seek to improve active utilization.
Which we anticipate to be up two percentage points in the third quarter and another two percentage points in the fourth quarter.
In spite of the hot dry dock schedule.
Further we project the average day rates have declined just over 1% in the third quarter.
As the North sea seasonality type resolve and we realize the effects of legacy contracts that reprice downwards in Mexico in the North Sea.
Overall, we expect vessel level margin to drop to the low 34% range in the third quarter before rebounding in the fourth quarter through the 37% range.
As mentioned in our press release, our objective of being the most cost efficient operator in industry is clearly in focus and remain on track to meet our general and administrative run rate objective.
The operational integration is complete and we are in the final stage of the system implementation that will begin to drive additional synergies throughout our shore based infrastructure.
Our 2019 exit run rate objective for general and administrative expenses $87 million.
But rest assured that we do not envision that is the best we can achieve we will continue to find ways of getting efficiency and cost savings in our business.
And we look forward to updating you on our progress.
With that I'll hand, the call over to Clinton Clinton.
Thank you John and greetings everyone.
I thought I would open by reinforcing from the financial perspective, some of John's comments and reiterating what makes us different.
First of all we have a rock solid balance sheet, we closed the quarter with $383 million of cash.
We do have 435 million of debt the bulk of which matures three years from now in August 2022, but we are easily able to service the debt and can easily refinanced the connection and consumption with our cash on hand, we have no plans to alter our loan.
In addition to the recovery is much further along we do have covenants on those covenants get tighter over the next six quarters, but we are performing well above required levels today, and we're performing today above the tightness those covenants get over the tenor of the debt.
We have no required capex, we have new vessels under construction every investment we make is our decision based on today's economics, and we have no concern about shrinking the fleet in order to grow return on capital.
We have been free cash flow positive year to date, and we anticipate being free cash flow positive on an annual basis. In addition to all of that we are pleased with the continued quarterly improvement of the core business, we're not satisfied but we're pleased.
Revenue was up again quarter over quarter and average day rate was up substantially operating expenses were down overall operating expense per active day was down DNA expense were down below the tidewater standalone pre merger levels. These metrics are all.
Our direction, but we are still not satisfied and we are continuing to work to improve all of these metrics each and every quarter as we go forward.
Working capital investment was up which is the wrong direction, but we will be addressing that as we go through the remainder of the year.
My objective today as always is to give you a quick summary of Tidewater quarterly results and to give you an update on our progress of our gene a target run rate of 87 million per year.
And an update on the integration of the two companies ERP systems.
Overall, a nice improvement in operations over the first quarter revenue was up operating expenses were down overall incremental operating margins were 144% a portion of the operating expense improvement was the reversal of the insurance approval John mentioned in the Americas of $1.1 million, but even after removing the benefit of that item consolidated incremental margins were 116%.
Quarter over quarter average day rates were up 8% in the Americas, 1% in the Middle East, 19% in Europe and down 2% in West Africa.
Overall average day rates were up just over 6%, which was which is a significant overall with an average day rates for one quarter and as John mentioned as our second quarterly increase in average day rates. The start of what we believe to be a long term trend as the industry begins to benefit from an improvement in the supply and demand imbalance principally from the attrition of vessels.
At 100% incremental operating margin, which is our objective and the active fleet of 162 vessels with 79% active utilization as we experienced in the second quarter, a 6% increase in average day rate.
To $30 million of additional vessel operating margin on an annual basis.
As we look to the third quarter, we had five significant contract rollovers in the second quarter. These contracts were on pre downturn rates as many of them were five year contracts cut in the summer of 2014.
The rule will stall the average day rate progression and as a result, we are expecting the decrease, albeit slate and the average day rate in the third quarter.
These contracts, where the last on pre downturn rates and we do not foresee further downward pricing pressure on existing contracts as we see all current contract at or about market rates I would also add that we see the market getting.
Stronger globally, and we do not see any area getting worse.
Active utilization drop slightly in the second quarter down one percentage point to 79% the heavy drydock schedule for 2019 is weighing on this metric and we will continue to look for ways to improve this metric by continuing to optimize drive outperformance as well as over the long term employing the use of technologies and techniques to reduce downtime due to repairs.
Gene able to quarter have $460000 of severance related items, which results in an ongoing quarterly run rate for the second quarter of $23.2 million.
Just down slightly from the comparable figure in the first quarter of $23.4 million. Our objective is to get to a quarterly run rate.
8 million by the end of the fourth quarter getting to the lower DNA level will result from lowering headcount and professional service fees and we are actively executing on a plan designed to give us to our run rate objective, but the plans results are weighted towards the end of the fourth quarter.
Although the metric we are focused on its noteworthy to point out that we are already had a quarterly Gina expense level below what the company was experiencing prior to the merger.
Consolidated revenue for the quarter was 125.9 million up approximately $3.7 million from the prior quarter.
Driving the increase in revenue was the aforementioned increase in day rates and the additional day in the calendar quarter offset by 1% lower active utilization and an average of fire.
Your vessels working in the quarter.
Fewer vessels working on the quarter reflects the capital discipline, we are enforcing on the business as vessels in the fleet reach their mandatory dry dock investment a portion of these vessels will not meet our return on investment objective.
These are generally the older vessels with lower overall technical specifications. These vessels become candidates for sale outside the industry or recycling.
Meanwhile, we do have higher specification vessels in lay up and these vessels are being reactivated when economically justified overall as John indicated we anticipate the actively tracking further as we go through the remainder of 2019, but increasing slightly as we get into the first half of 2020, when we anticipate economic conditions will be right for the reactivation of some of the higher specification vessels, we have in layup.
But overall, we're not averse to shrinking the fleet in order to improving long term returns on capital.
Active vessel operating costs for the quarter was down $1.8 billion with $1.1 million of that decrease due to the reversal of insurance accrual mentioned previously and the remainder is the result of having on average five fewer vessels active during the quarter. The quarterly active vessel operating cost per day was $5423 a decrease of $13 per active day from the first quarter and a decrease of $9 per active day from the fourth quarter of 2018.
The cost per active Bay remains in line with our expectations for the fleet and where we anticipate vessel operating cost to be for the remainder of 2019.
We are migrating legacy tidewater areas onto the Sep platform. The ERP system integration activities have been in process since the date of the merger, but we hit a key milestone in June the Tidewater Norwegian operations came online in June which was a test case for the migration of the other regions.
The remaining regions will be brought online beginning in October .
User acceptance testing training in final preparation for the migration are ongoing and we see new no impediments to achieving that objective.
European system consolidations, the last major piece of the merger integration, but it won't be the last improvement in efficiency and scalability. The new system will enable further improvements to shortbus efficiency and scalability as we go through 2020 and beyond.
We'll have additional merger related costs throughout the second half of 2019, partially related to severance, but mostly related to professional service costs as we go through the remainder of the year.
We will continue to make you aware of these costs as we have in the past few quarters. These amounts will pick up in the third and fourth quarter as professional fees related to the integration increase as we approach to go live date.
The cash balance at the end of the year was $383 million down $15 million from the prior quarter.
We mentioned on last quarter's call that we anticipated the second quarters will be a use of cash due to the timing of trying back payments and other working capital matters. The use was a bit higher than we anticipated and we saw a sharper bills and accounts receivable than we were expecting from a few clients im not concerned about the collectability of any of these amounts and I anticipate that these will be cleared up in the third and fourth quarters of 2019.
The first half of 2019, the company was free cash flow positive in north of $2 million, and we anticipate being free cash flow positive for the full year.
For the second quarter of 2019, the company was free cash flow negative in the amount of $6.7 million driven by the build in receivables.
We do include proceeds from vessels bowls, and our determination to cash flow. We see these vessels as excess inventory than we are liquidating this position over time.
For the first half of 2019, we had proceeds of 20.6 million from the disposal of obsolete vessels.
The 60 vessels remaining in lay up have a combined book value of 126 million and that amount as including property and equipment line on the balance sheet.
Since quarter end, we have sold three additional vessels for total proceeds of 4.4 million.
And with that I will turn the call back over to John for his final comments.
Thank you Quinn, we are optimistic that we are investing in the right people.
Processes in vessels to thrive through this protracted downturn and beyond.
This includes responsible reducing costs, while ensuring that operational performance remained industry leading.
Additionally, we will maintain active supply on the basis of its economic viability.
And we will not chase market share at the expense of profitability.
This disciplined by us and other market participants will continue to facilitate the needed recovery in day rates.
That has begun evidencing itself.
Past two quarters.
While we cannot predict the pace of the recovery, we see reasons for optimism in each of our markets and believe we believe that we are in the best position to capitalize on the fundamental improvements.
Adrian Please open the call for today.
Thank you well now begin the question and answer session.
Do you have a question. Please press Star then one on your Touchtone phone.
If you wish to be significantly queue. Please press the pound sign or the hash key.
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You may need to pick up the first question your numbers. Once again, if you have an audio question. Please press Star then one on your Touchtone phone and our first question comes from Turner Hollings Carlson capital. Your line is open.
Hey, guys. Good morning, Mr. Turner Holm from from Clarksons Platou.
Good morning.
Hey, I just wanted to drill into year. Your last comment in your prepared remarks that the reason for optimism.
All the markets that you mentioned and.
What we're hearing is maybe some some flattening leading edge day rates and in particular markets, perhaps seasonal and the north sea.
The guidance is for maybe flat to slightly down day rate for the third quarter can you kind of just flesh that out a little bit how you're thinking about that activity related inventories at certain leading edge day rates that you're seeing.
I think it's a combination of things turnaround that good one every market we participate in.
Is on solid footing right now.
And really the driver of our slight reduction in average during the third quarter as more as a result of coming off those legacy term contracts and higher day rates not reflective of where leading edge day rates are and as you know we guided to for quarter day right back up.
Slightly so as we see we see improvement in every major market again some of its seasonality like you said the north Sea will watch.
The North sea as we progress into the winter months.
West Africa appears to be some gaining some strength around the world Brazil's gaining strength in Mexico's gaining strength demand is holding solid so again, the Gulf of Mexico really driven by.
Supply migrating outside of the US Gulf of Mexico has been holding up nicely. So again as we look around the world. There's reasons for my optimism and all of our key markets.
Sure Thanks for that.
I understand you all took some contract down.
And beyond.
We set the or have some vessels in a way down there.
Relatively encouraging discovery earlier this week.
Hello, I'm wondering if you all see that it's being it's orders.
Yes attractive market and maybe.
To add some massive vessels at the next couple quarters.
The I think you have to be paying attention to the Guiana area.
Actually our vessels are moving to certain item.
For Apache and then in October we have a vessel moving into Exxon Guiana for a five year contract.
So thats a market, we're staying very close to and also obviously as you mentioned great news on the Telo discovery. So I think obviously an area, it's going to get a lot of attention from us and others.
Thanks, John and quickly just one for you talked earlier in the year about possibly extracting some value from that due to the belief net receivable balance and as soon as it's quite quite flat. This quarter is there is there anything to report there with regard to possibly monetizing that Alan and and.
Yes, or no is that baked into the free cash flow positive outlook for the year.
You know, we're still looking and working with our partner with the long term holds for that joint venture I don't expect that we'll be extracting significant amount of value out of that particular receivable.
As we go through the remainder of 2019, but we are working with them on a systematic collection of that receivable. So what I would hope that we were able to do is formalized that receivable on more of a long term note.
As we go forward and have more of a systematic payment and liquidation of that but it won't be used some of the significant gains that we had last year from that particular.
Receivable balance.
Hi, guys I appreciate it guys.
And does your mind, you're going to the queue. Please press Star then one on your Touchtone phone and next question is from Patrick Fitzgerald from Baird. Your line is open.
Hi, guys.
Let's see maybe you said it what's the average age of your fleet now after all the.
Divestitures.
The average excuse me the average age of the active fleet is about 9.8 years.
And the total fleet inclusive of the stacked fleet is right at 10 years.
Okay.
Okay.
Is there an average like deadweight tons that you guys could provide.
We'd have to do that offline will.
Okay, I will follow up with you, but we can we don't have that a tip of our fingers.
Okay.
So what's deferred Drydocking expected you said, it's going to be remain elevated for 2019 and 20, what do you expect it to be for the remainder of the year and then what does it look like and 20.
We expect the total balance for the year to approximately $62 million and we expect a similar number in 2020 as well.
Well, obviously all of those investments will go through a review for their made but based on the age of the fleet and based on the requirements for special services.
Definitely seeing the Lumpiness and 2019 and 2020.
My expectation is as we go into 2021 that will decrease.
Maybe 20% to 30%, but will be on a five year cycle.
Okay. So.
If theres a way I know that's kind of theoretical but.
Is there a way to think about like maintenance capex.
For your fleet, what it will be at the end of this year.
In terms of both vessel Drydocking and.
Dan.
Other maintenance Capex kind of on an annualized basis, just just to kind of put it that in a framework.
So I would encourage you to think about it is right now.
Five year special surveys are running about averaged $1.2 million per vessel and so it depends on the age of the vessel when they hit that serve but overall, we expect 20% of the vessels every year to hit that $1.2 million than youre going to run into a number that.
Pens on the active fleet, but it's going to be in the $36 million to $40 million range.
That's straight lining that over every period, noting that like for example in the current year, we're going to be just above 60, and maybe the same level in 2020 as well.
Okay.
All right and so.
Given your guys is balance sheet.
You, obviously are in a much better position to handle that which is pretty.
Pretty large number.
Per vessel.
What have you seen that impacting some of your competitors.
Assuming they have kind of the same lumpy schedule, maybe which maybe isn't true.
Well I think it is true and John mentioned in his prepared remarks, I'm actually surprised that we haven't seen more companies hitting the wall I'm not sure where they're getting the money for these products.
But it is a highly fragmented industry and people will do whatever they can to survive in this market. So obviously, they're leaning on the financial institutions.
To some extent cash from operations, although a lot of us are still operating discipline above cash flow breakeven. So our anticipation as we go through the remainder of 2019 2020 is we're going to see.
Acceleration and vessel attrition because of the investment required.
Okay and are you baking that into your day rate projections.
Are you just assuming they're going to come up with the money to continue to operate their vessels.
So there were three upside to your kind of your answers your day rate into it.
Expectations, while in all of our comments were anticipating a bit of vessel attrition because of that factor and sometimes it comes in the form of this increased utilization and sometimes it comes in the form of day rate, but overall it should be positive to the revenue line on a per Boe basis.
Okay.
And then I wanted to ask about.
Ill West Africa, you said, you're seeing some bright spots I guess in your comments, but that was in terms of loaders steel on the revenue.
Declined sequentially in the quarter was I believe in West African deepwater so.
Are you seeing kind us.
More contracts that will be announced on the floater side. There are what gives you optimism there.
I think it's two parts really it's two areas its Angola, Nigeria, Angola is looking to pull poised to grow in the back half of this year and through 2020 and that will be more floater driven.
And then if you go to Nigeria that will be more jackup driven.
That's where we see the two strongest areas right now is Angola, Nigeria, again, Angola, being floated driven Nigeria more jackup driven.
Okay. Thanks, and then just one more question.
Covering the industry on the drilling side hear a lot about improvement in the jackup space and kind of.
Slower recovery in the floater space yet it seems like your results this quarter you had.
More encouraging results on the on the deepwater side and.
I guess, Tony towing supply vessels were down sequentially.
Is that just where you've chosen to.
Kind of sell vessels related to.
Kind of smaller older vessels or what's the read through there that we should be taking away from this yes, I think one thing when you when you take a look at just let's just pick the deepwater vessels not all of our deepwater vessels are supporting floaters.
If we have an opportunity to put it to work with on a jackup contract or a pipelay contract to our construction contract. We'll do that that's just an internal nomenclature, how we track those vessels.
The towing supply was down quarter over quarter.
Some of that with just in and out of in both West Africa, and the Middle East, but if you look at the Jackup rig count growth is right now it's been in the middle East and it's coming to that to West Africa Pacific lead in Nigeria.
Okay, and then nor is there you try to bring it down and then the North Sea is a deepwater PSV market and Thats, where we had our strongest market.
Yes, hi.
Sorry.
So just just is there any way to break down like how much revenue you get from floaters versus Jackups, just even a ballpark would be.
Helpful.
Patrick we don't we don't track it off hand.
It's pretty well diversified in terms of Tidewater revenue stream between construction activities production support and then the drilling activity split between.
Jackups and floaters.
Okay, all right fair enough. Thanks. Thank you very much thank you Patrick.
And this concludes the question answer session I will turn the call back over to Matt Miszewski for final remarks.
Okay. Thank you Adrian and thank you for everyone that participated in the call. We look forward to your continued participation in Tidewater stock and thank you for your interest in the company.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Yes.