Tidewater Inc.
Q4 2020 Earnings Call Transcript

Published: 5 Mar 2021

[Operator:]

Good morning, and welcome to the TDW Reports Results for 12 Months Ending 12/31/20. At this time – my name is Brandon and I'll be your operator for today's call. Please note, this conference is being recorded. And I will now turn it over to Jason Stanley, Vice President, ESG and Investor Relations. You may go ahead, sir.

[Jason Stanley:]

Thank you, Brandon. Good morning, everyone, and welcome to Tidewater's earnings conference call for the three and twelve months ended December 31, 2020. I'm joined on the call this morning by our President and CEO, Quintin Kneen; our Chief Accounting Officer, Sam Rubio; and our General Counsel and Corporate Secretary, Daniel Hudson; and our Vice President of Sales and Marketing, Piers Middleton.

[Quintin Kneen:]

Thank you, Jason. Good morning, everyone, and welcome to the fourth quarter 2020 Tidewater earnings conference call. I'm pleased to say that this has been another solid quarter for Tidewater. It's hard to overstate the challenges we faced in 2020. But the worst of the pandemic-driven downturn seems to be behind us. Revenue surprised us to the upside in the fourth quarter. On the last call, we guided to $385 million for the year or $81 million for the fourth quarter. And we came in at $397 million for the year or $92 million for the fourth quarter. Historically, and many of you already know this, the fourth quarter is normally a tick-down from the third quarter. It's due to weather in the North Sea but also due to calendar year budget exhaustion. And incidentally, the first quarter is the weakest calendar quarter, likewise, due to weather in the North Sea but in addition to that, some clients tend to charter on a calendar year basis at the beginning of the year. So, you get a bit of charter higher gap in the first of the year. So, the revenue surprise in the fourth quarter also resulted in the fourth quarter revenue being higher than the third quarter revenue, which is why I say it seems that the worst of the pandemic downturn is behind us. Also noteworthy in the fourth quarter was the incremental gross margins on the excess revenue. Revenue was up $11 million from guidance and gross margin was up $10 million. That's a 90% incremental gross margin, which demonstrates extremely high operating leverage of our business. In this case, it's driven by higher-than-anticipated day rates and improved active utilization.

[Piers Middleton:]

Thank you, Quintin, and good morning, everybody. Before I talk about each of the regions, I just want to make a couple of observations about 2020 and what we hope will happen in 2021. Firstly, it goes without saying that 2020 was an extremely tough year. But we saw an unprecedented drop in demand for our services. But as our results showed, our teams around the world still managed to deliver value in very trying circumstances, not just by winning work but being disciplined in how we won that work. Those vessel owners that took work that did not cover their debts are, in our view, accepting a fate that is equivalent to death by a thousand paper cuts. And we'll just continue to extend out any hope of the market recovery.

[Quintin Kneen:]

Thank you, Piers. Our objective, as we've stated many times before, is to generate more cash by operating in fewer vessels at higher day rates and to operate them at a lower operating cost per vessel and at a lower G&A cost per vessel. We're doing this while carefully mining the capital expenditure and working capital investments. These objectives are simply stated but achieving them requires innovative technology, agile change management and strong financial discipline. The company is free cash flow positive. And our objectives and compensation plans are all geared to keeping it going that way. And with that, Brandon, we will open it up for questions.

[Operator:]

Thank you. And from Baird, we have Patrick Fitzgerald. Please go ahead.

[Patrick Fitzgerald:]

Hi, guys. What did you give in terms of gross margin guidance?

[Quintin Kneen:]

Hey, Patrick. How are you? 30%.

[Patrick Fitzgerald:]

Okay. And you're not giving any revenue guidance, right?

[Quintin Kneen:]

Well, I would encourage you to see 2021 as a reversal of 2020. So, my expectation is that we're going to be just about level with where we were at last year. But as Piers indicated, and as I had some comments on, I'm a little bullish on the second half of the year.

[Patrick Fitzgerald:]

Right. Okay. So, kind of a broader question, day rates, obviously, it's a nice better fourth quarter than you expected initially. Obviously, the price of oil here is significantly higher than it was a few months ago. I mean what – I guess what – in big picture, what needs to happen to see a material increase in day rates?

[Quintin Kneen:]

So of course, it's always down to supply and demand balance, right, okay? So, what you've got now is industry – the industry as a whole recovering from the pandemic. So, what happens in years like 2020, we found the same thing happened in 2015, is everybody pulls back on any type of maintenance that isn't just absolutely necessary. So, it's not just the drilling activity pulls back, which a lot of people talk to and talk about. But as said, the maintenance level of activity pulls back substantially. And if you think about the demand equation for our business, right now, it's running about 70% of the boat activity is related to just regular maintenance of ongoing platform production or activities and about 30% of it is drilling activity. To the extent that drilling comes back, that would certainly tighten up demand much faster and, therefore, push day rates and push that supply and demand and balance into something that is more in the boat owner's favor. But the two things that I'm really counting on as I look out to the rest of 2020 and into 2022 is not really a pickup in drilling activity but a resurgence of the maintenance activity that has been delayed and then just the continued attrition of vessels. We haven't built a vessel in this industry in over six years. And everybody's been real thin in profit margin. So, vessels haven't been reinvested in. So, we're starting to see vessels drop out of the supply chain nicely. And I anticipate the attrition and supply and the resurgence in demand, mostly from maintenance activity, are what's going to put us in balance by, call it, the end of 2021.

[Patrick Fitzgerald:]

Right. Do you have like an effective utilization figure that you look at across the industry? Where are we at in terms of that?

[Quintin Kneen:]

I'll tell you, it's hard to tell because so many of the vessels that are on the rolls today, so many of the vessels that are in the denominator of total vessels in the world, are not really suitable for work, okay? Let me give you a message in a second. Let me tell you why I think a lot of the information out there is unreliable. There's a lot of vessels out there on the sidelines that have been idled since 2015. They haven't been maintained. And they're not really coming back to work, okay? So, they're in the denominator of a lot of the vessel counts and ratios that you see in our industry. What I see today is utilization levels in that mid-70s range, so call it, 70% to 75%, okay? Now the better companies in the better regions like, for ourselves, we can push that easily into the high 80s and low 90s, right? It all depends on your vessel class but also depends on your particular dominance in the various regions. And that's what you look for. You look for ways in a vessel class or within a particular geographic region to get a little – to get a bit more than the industry average. Now if your question is also leading to, okay, at what point do you really begin to get day rate increases, like when can you push price, I'd tell you that's probably closer to the 85%. And it's not just 85% in the localized region. It's 85% in the localized and adjacent regions because you always have the ability of other vessels kind of saunter into your work area and keep rates down.

[Patrick Fitzgerald:]

Right. But it's ultimately an increase in demand for just the number of PSVs is what you are…

[Quintin Kneen:]

Yes.

[Patrick Fitzgerald:]

Okay. All right. Thank you.

[Quintin Kneen:]

Yes.

[Operator:]

Okay. It looks like no further questions at the moment. Quintin, we'll turn it back to you for closing remarks.

[Quintin Kneen:]

Thank you, Brandon. Thank you, everyone. And we will update you again in May. Goodbye.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you joining. You may now disconnect.