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Tidewater Inc (TDW)
Q3Â 2020 Earnings Call
Nov 6, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to earnings conference call, third quarter 2020. My name is Sylvia, and I'll be operator for today's call. [Operator Instructions]
I will now turn the call over to Jason Stanley, Vice President of Investor Relations and ESG. Mr. Stanley, you may begin.
Jason Stanley -- Vice President of Investor Relations
Thank you, Sylvia. Good morning, everyone, and welcome to Tidewater's earnings conference call for the quarter ended September 30, 2020. I'm joined on the call this morning by our President and CEO, Quintin Kneen; our Chief Accounting Officer, Sam Rubio; our General Counsel and Corporate Secretary, Daniel Hudson; and our Vice President of Sales and Marketing, Piers Middleton. 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-Q for additional details on these factors. This document is available on our website or through the SEC at sec.gov. Information presented on this call speaks only as of today, November 6, 2020, and so 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 measures is included in last evening's press release.
And now with that, I'll turn the call over to Quintin.
Quintin V. Kneen -- President, Chief Executive Officer and Director
Thank you, Jason. Good morning, again, everyone, and welcome to the third quarter 2020 Tidewater earnings conference call. I'm pleased to say that this has been a solid quarter at Tidewater. Against the ongoing challenges of the pandemic, we continued to successfully execute on the strategy we outlined on the first quarter earnings call. Before we dive into the consolidated quarterly results, review our operating segments and open the call up for questions, I'd first like to discuss some noteworthy developments at Tidewater since we last spoke. The first is the appointment of two new board members: Lois Zabrocky, President and CEO of International Seaways and also recently appointed Commodore of the Connecticut Maritime Association; and Darron Anderson, President and CEO of Ranger Energy Services. Both new directors bring broad industry experience and diversity of insights to our Board's governance and decision-making processes, and we're excited to have them aboard. Also joining me on the call today is Piers Middleton. Piers joined Tidewater in the third quarter and is leading up global sales and marketing. I'm excited to have Piers on board as we fill out the management team and position Tidewater for the future of offshore energy services. In addition to sales and marketing, Piers will be assisting in the strategic evaluation of hydrocarbon and renewable investment opportunities as we position Tidewater to benefit from the offshore energy activities over the next 20 years.
You may have picked up in the press, the announcement of our acquisition of 11 crew boats from Hermitage Offshore Services earlier in the fourth quarter. These vessels will strengthen our position in Angola and West Africa and expand our market share with a total of 27 active vessels in the region. Given their relatively new condition, they will also reduce the average age of our active crew fleet. This acquisition forms part of our ongoing fleet rationalization program and opportunistic approach to M&A. As we continue to divest our oldest, least efficient and least profitable vessels, we create space in the fleet for a higher quality, newer and more efficient vessels to maintain the right scale of our operations. Given the location of our West Africa shore base, we believe Tidewater will be able to manage these vessels in a manner that will be easily accretive to our fleet profitability. six of the vessels are already under contract. We continue to focus on reducing our net debt commitments and further improving our peer-leading leverage ratio. This quarter, Tidewater is once again cash flow positive with $30 million of free cash flow. And for the nine-month period thus far in 2020, we are free cash flow positive even before including the cash generated from asset divestments, and we are proud to be on track to be free cash flow positive for the full year 2020. During the third quarter, we repurchased $28 million base value of our 2022 notes for 95% of par. On Tuesday, we launched a tender for another $50 million, and we simultaneously launched a consent for the modification of certain terms within the indenture, principally the financial covenants. We look forward to continuing to reduce this debt and improving our net debt position through our dedication to remaining free cash flow positive.
The debt repurchases in the third quarter and the current tender are part of our ongoing program to position the company to refinance or just simply repay the bonds when they mature in 2022. We stated last quarter that our revised estimated revenue for 2020 was $390 million, and that estimated cash operating margin would be 35%. We now anticipate full year revenue to be approximately $385 million, which is down $5 million from what we estimated as full year revenue on the last call. We still anticipate cash operating margins of 35%, which would result in cash from core operations of $135 million for the year. Further, we budgeted $20 million for frictional costs associated with the pandemic, and we still see that as the annual impact of the crisis. This is the increased cost of travel, salaries, the cost of quarantining mariners, the cost of fuel to transit vessels coming off-hire to their lay-up locations and the incremental cost of having those vessels in lay-up. In particular, for the fourth quarter, we anticipate higher fuel costs related to vessels transiting to their lay-up position, excess salaries and de-crude the vessels, which is what we've experienced in the second and third quarters, and then an increase in the lump sum cost of mariner severance as the vessels are de-crude. All in, we see these extra costs in 2020 to be $20 million.
This $20 million of pandemic cost gets us down to cash flow of $115 million. General and administrative expenses have remained a focus for Tidewater. We've been successful in reducing costs wherever possible, both onshore and offshore. And I'm pleased to say that G&A is once again down this quarter to $17 million, with full year now anticipated to be $72 million. This is another $5 million improvement from the $77 million we forecasted on the earlier call, and that gets us to $43 million of cash flow for the year. Our G&A costs continue to come down. That's now seven consecutive quarters of G&A run rate cost reductions. Our annualized G&A expense for the third quarter is under $70 million. There's a couple of data points, the combined 2014 annual G&A for Tidewater and GulfMark stand-alone was $253 million. And the immediate run rate post-merger was $145 million with a post-integration objective of $100 million. We will continue to seek techniques and processes to remain the low-cost leader in terms of shore-based operations. However, when we fill the open CFO position, we will see a noticeable increase in G&A costs for that role and its associated support expenses. Vessel disposals are now looking to be $38 million, less dry dock expenditures of a revised $35 million for the year, which nets us another $3 million. And as I mentioned earlier, we purchased the 11 Hermitage vessels for $5 million. So net vessel investments for the year will be $2 million. We are anticipating a liquidation of working capital, net of taxes and other costs of $21 million. So all totaled, we are anticipating $43 million of cash flow from vessel operations, less $2 million of net vessel investments and $21 million of cash from working capital and other, for a total of $62 million free cash flow for the year.
All very achievable, the one area that I'm bothered about from a timing of cash receipts perspective is the continued generation of cash from the liquidation of working capital. We have one customer, the national oil company of Mexico, which is delaying payments to many of its vendors, including Tidewater. It's disappointing and frustrating that we have to endure this from a BBB rated enterprise, but I am not at this time worried about the ultimate collectability of the amounts due. Delivering on our free cash flow objective for 2020 will require similar quarterly results in the fourth quarter as we achieved in the second and third quarters. And the formula is the same: we must continue to minimize dry dock expense; we must quickly lay-up and de-crew idle vessels; we must timely collect what is due from us from large multinationals and national oil companies. Importantly, we have to dispose of older, lower specification vessels, all executed well thus far in 2020 and all achievable in the fourth quarter as well. Our vessel disposal program continues to progress with 47 vessels sold year-to-date. As previously mentioned, we now expect proceeds of $38 million in 2020, and this is somewhat dependent on the ability of the recycling yards to continue to manage their increasing backlog of tonnage from all over the shipping sector. The sale and disposal of our older tonnage, much of it stacked and unlikely to return to service, makes a material impact to stacking costs and further highlights the benefits of rationalizing the fleet during this downturn. All of this leaving us ready to enter a recovered market with a truly optimized and cash-generative fleet.
And now it's my pleasure to turn the call over to Piers for an overview of the markets in our key operating areas.
Piers Middleton -- Vice President of Sales and Marketing
Thank you, Quintin. Good morning, everyone. As we mentioned in our earnings release in the third quarter and nine months ended, we generated revenue of $86.5 million and $305.2 million, respectively, which is a decrease of 17% for the same nine-month period in 2019. Whilst it is, of course, always disappointing to not be knocking it out of the park every quarter, we believe it is an amazing testament to our teams around the world who have managed to keep the majority of the fleet working and earning against not just the serious headwinds caused by the pandemic and subsequent fall off of short-term vessel demand, but also against our increasingly aggressive competitors fighting to survive. As mentioned in our previous earnings call, our West Africa and Europe, Mediterranean fleets continued to bear the brunt of the decrease in activity. Globally, we had 45 fewer average active vessels in the third quarter of 2020 than in the third quarter of 2019. In addition, while active utilization slightly decreased from 80% in the same period in 2019 compared to 78% in the third quarter of 2020, we managed to increase utilization by 4% compared to the second quarter. Looking at our results at the regional level. Despite the industry downturn, our average day rates across the fleet stayed pretty static compared to the last quarter at $10,500 per day and still up approximately 5% against the same quarter last year. This was still driven by the previous tailwinds of increasing day rates from contracts entered into before the crisis began, but also by careful management of the active versus stack fleet, helping our regional teams maintain some commercial discipline when bidding for any new work.
Winning work at any cost, in our view, is not a successful long-term strategy. In the Americas region, we saw revenue decreases of $4.4 million or roughly 13% during the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019. The decrease is primarily the result of seven fewer active vessels operating in the region year-on-year compared to three in the previous quarter, caused by the low demand. However, the region still maintained a small vessel operating profit in the third quarter of $107,000 and a year-to-date vessel operating profit of $3.5 million. Utilization for the quarter was at similar levels to 2019 of 82%. The region still faces challenges, but we believe our flight to quality tonnage, continued careful control of our operating expenses and commercial discipline stands us in good stead in the region going forward. Our Middle East, Asia Pacific region continued to see strong-ish demand relative to the rest of the world, with utilization and average day rates, both ticking up slightly through the second quarter 2020. The active fleet decreased by two vessels from the previous quarter. Our average rates in the region were $8,040 per day compared to $8,009 in Q2 of 2020 and $7,520 per day in Q3 2019. Vessel revenue was up $515,000 compared to Q3 2019, making the vessel operating loss for the year-to-date, $2.5 million compared to a loss of $4.1 million in Q3 2019. We remain positive that demand going forward will remain relatively stable in the region, especially in the Middle East, although we've also had some recent success picking up some contract awards in Asia Pacific as well. In the Europe and Mediterranean region, our vessel revenues decreased 14% or $2.9 million compared to the second quarter of this year.
The lower revenue was driven by having five fewer active vessels in the region, however, we were able to increase average rates for the quarter by roughly 5% compared to the second quarter 2020 and almost 10% compared to the third quarter of 2019. Utilization for the quarter also improved significantly to over 95% compared to 86% for the same quarter last year. The segment reported an operating loss of $3.9 million for the quarter ended September 30, 2020, compared to an operating loss of $276,000 for the prior year quarter, which mainly is due to the decreased revenue. Whilst the winter months are historically quieter for the European market, we are starting to see some activity in the European and Mediterranean regions from oil companies looking to either reboot campaigns that were delayed from earlier in the year, or are hoping to take advantage of the perceived oversupply of idle tonnage by coming out for new longer-term tenders, presumably hoping to pick up some cheap vessel cover going forward. Finally, to West Africa, where the region as a whole continues to struggle. Vessel revenues decreased 30% or $6.6 million compared to the previous quarter. The active vessel count was down by a further 15 vessels from the previous quarter, which allowed us to increase active utilization from 55% during the second quarter of 2020 to 66% in the current quarter. Average day rates for the region were $9,643, an increase of 5% from where we were this time last year.
Vessel operating loss of the area was $10.2 million for the quarter compared to an operating profit for the same period last year of $678,000. The decrease is due mainly to the drop-off in revenue, coupled with the cost of mobilized vessels for the lay-up positions. West Africa has been a struggle for everyone through 2020 as we come to terms with a pandemic, but as with the other regions in which we operate, we are starting to see some early green shoots as our clients start to look to open back up. Recovery will probably be a little slower than other areas, but we are fully committed and believe in the region going forward as shown by our purchase of the 11 modern crew boats, which will be used to improve and modernize our African fleet. Last word from me. And although I've only been with Tidewater for a month or so, I'd just like to thank all the men and women in the company who have worked so hard to keep our vessels working in what has been a very challenging time. It has been truly impressive to join this company and see that everyone has managed to achieve during such a difficult period.
Back over to you, Quintin. Thank you.
Quintin V. Kneen -- President, Chief Executive Officer and Director
Thank you, Piers. It's great to have you here. Our objective is to generate more cash by operating fewer vessels at higher day rates, 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. The company is free cash flow positive, and our objective and compensation are all geared to keeping it that way.
And with that, Sylvia, we will open it up for questions.
Questions and Answers:
Operator
Thank you. We will now begin the Question and Answer session. [Operator Instructions] And our first question comes from Patrick Fitzgerald from Baird.
Patrick Fitzgerald -- Baird -- Analyst
Hi, guys. Thanks for taking the questions. With respect to the consent solicitation and then the tender and asset sale offer. It seems geared to do something with the Troms Offshore credit agreement, and I'm just wondering what is the -- what would be the reasoning for taking that out?
Quintin V. Kneen -- President, Chief Executive Officer and Director
So right now -- and allow me to say, I'll have to defer to the tender documents in their entirety, but I'll give you a quick summary, but please use those as the defining documents. Right now, we have the ability to repay $35 million under the Troms indebtedness, OK? Those -- the covenants in the Troms indebtedness mirror what is in the bonds. Right? So if we go from modifications in the bonds, we also have to go for modifications in the Troms debt. Otherwise, we don't really lower the covenant requirements or anything like that because we have two sets that mirror each other, and they both have to be individually modified. So in order to approach the Troms lenders with those modifications, we need some flexibility in order to repay the Troms debt, similar to what's being repaid on the bonds.
Patrick Fitzgerald -- Baird -- Analyst
Okay. But the rates on the Troms debt is lower than the secured notes and they're due later, right?
Quintin V. Kneen -- President, Chief Executive Officer and Director
It's not our objective to pay off lower coupon longer-dated debt with that modification. What our objective is, is to get the ability to negotiate with the Troms lenders to modify the covenants the same way that we're modifying them in the bonds.
Patrick Fitzgerald -- Baird -- Analyst
Okay. And the concern there would be, you just don't know what 2021 is going to look like, and if it's bad enough, then you want that covenant flexibility in terms of, I guess, the interest coverage ratio as that steps up?
Quintin V. Kneen -- President, Chief Executive Officer and Director
That's right. Obviously, the second wave is hitting us now. As we look into 2021, we've got a good feel for what the base load is, but the reality is there's a lot of uncertainty in the world today. And so to get the modifications under the bond is one thing, but it's also very important to get the same covenant modifications with the Troms debt.
Patrick Fitzgerald -- Baird -- Analyst
Got you. Okay. Thank you very much. In terms of M&A, obviously, you've got a good deal on some of those vessels recently, but is there anything bigger on the horizon, either in your expectation, either for you guys or for others in the industry?
Quintin V. Kneen -- President, Chief Executive Officer and Director
Well, for us, for sure. I can't speak to others in the industry, and there's not enough balance sheet capacity to do consolidation outside of Tidewater, but we look at opportunities all the time. We continue to seek opportunities. What I look for in consolidation is leveraging our existing economies of scale. And I'm not looking to enter any more regions, right? But I am looking for newer tonnage that we can bring into the fleet and average the fleet down in age and up in overall quality. At the same time, leverage and establish a short base footprint. This industry is highly fragmented. So it's not an industry where you can globally dictate prices, right? It's -- just there's not -- there's too much fragmentation in order to do that.
But you can get concentrated positions in certain areas and do better. And so we look for ways to concentrate our existing locations. When we talk about the Hermitage vessels, that was a really nice complement to an existing footprint in Angola. So we're able to add 11 vessels. We won't add any headcount. We can strengthen our position there and help be defensive as the market is generally oversupplied. And we'll look to do the same in other areas. We're not trying to emphasize Brazil at this point. And generally, we've been pulling out of some specific regions in Southeast Asia, although we're still very focused on Thailand.
Patrick Fitzgerald -- Baird -- Analyst
Okay. Yes. And I'm not going to ask you about guidance for 2021 in terms of cash revenue and cash margins, but in terms of vessel sales and dry dock, what do you -- what does that look like for 2021?
Quintin V. Kneen -- President, Chief Executive Officer and Director
So let me give you just some indications, but we are not completely through the budgeting process for 2021. And there's just a lot of uncertainty in 2021. I expect the dry docks, so that I can keep them in the $15 million to $20 million range in 2021. And the reason I feel I can do that, that's lower than I would say the run rate average would be for dry docks of a fleet of our size. But the reason I think we can do that is that we did so many dry docks in 2018 and 2019, right, that we were kind of living off the iron, as we would say. We've got enough boats that have enough paper, legitimacy to work seaworthy papers such that we can substitute vessels and work those vessels as opposed to doing dry docks on otherwise capable vessels. So we can minimize dry dock to those levels in 2021. Continue to see us shedding lower specification vessels.
And quite frankly, the specification bar continues to go up as the industry contracts. So as the industry contracts, vessels that were on the margin, say, six months ago, are now in the sale category. So you saw us move vessels into that sale category in -- kind of in the earlier part of 2020. And we'll make another assessment on that as we go into the Q1 period and probably we'll relay it when we relay everything else about 2021 on the Q1 -- on the call we do in Q1 with Q4 earnings. So, in general, I would expect a lower level of asset sales in 2021 just because we're burning through that marginal capacity, but my expectation is that we'll be in the $15 million to $20 million range as well.
Patrick Fitzgerald -- Baird -- Analyst
Okay. Last one for me.
Quintin V. Kneen -- President, Chief Executive Officer and Director
Yes. Okay. Go ahead.
Patrick Fitzgerald -- Baird -- Analyst
Just what's the -- how much from Mexico would it be? Would they have to pay you to get back to a kind of normalized payables -- I mean, receivable situation?
Quintin V. Kneen -- President, Chief Executive Officer and Director
$14 million. So they're behind, what I would say, is $14 million.
Patrick Fitzgerald -- Baird -- Analyst
Okay. Thanks.
Operator
[Operator Instructions] And we have no further questions.
Quintin V. Kneen -- President, Chief Executive Officer and Director
Well, Sylvia, thank you and everyone, we look forward to update you again in February. Goodbye.
Operator
[Operator Closing Remarks]
Duration: 26 minutes
Call participants:
Jason Stanley -- Vice President of Investor Relations
Quintin V. Kneen -- President, Chief Executive Officer and Director
Piers Middleton -- Vice President of Sales and Marketing
Patrick Fitzgerald -- Baird -- Analyst
