Welcome to the Earnings Conference Call Fourth Quarter 2019. My name is John and I'll be your operator for today's call. [Operator Instructions] And now, I will now turn the call over to Jason Stanley, Vice President, Investor Relations and Marketing. Jason, you may begin.

Thank you, John. Good morning everyone and welcome to Tidewater's earnings conference call for the quarter and full year ended December 31, 2019. I'm Jason Stanley, Tidewater's Vice President of Investor Relations and I'd like to thank you for your time and interest in Tidewater. With me this morning on the call are our President and CEO, Quintin Kneen; our Chief Accounting Officer, Sam Rubio; and our General Counsel and Corporate Secretary, Daniel Hudson. After I cover a few formalities, I'll turn the call over to Quintin for prepared remarks and then, we'll open up the call for you to ask questions. During today's conference call, we may make certain comments that are forward looking and not statements of historical fact. 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 Form 10-K 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, March 3, 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'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 will turn the call over to Quintin.

Thank you, Jason. Good morning, everyone and welcome to the fourth quarter 2019 Tidewater earnings conference call. We have been quite busy over the past year and especially so, over the past six months, transforming our business, so that we can prosper even in today's challenging offshore energy market. We definitely see the offshore vessel market improving, although we're determined to get back to acceptable levels of free cash flow even without the market's help. I spoke a lot on the last call about the transformation we are going through at Tidewater. We are adjusting our shore-based infrastructure and modifying our culture to embrace a returns-based business philosophy. We have the leading position and the strongest balance sheet in a very challenging industries. Our employees know that and it makes a difference, our customers know that and it makes a difference, our suppliers know that, and it makes a difference. Tidewater is committed to making a difference in this industry. And on today's call, I'm going to talk to you about where we think the industry needs to go. I'm also going to focus on free cash flow, because we feel this metric is going to be the key to managing the business back to acceptable returns and then I'm going to talk about the Company's performance by region. I want to open up the main dialog on the call today with a discussion about the need to transform the industry in which we operate. Transforming the Company is difficult, but at least it's within your control or at least that's what I tell myself. Transforming the industry is a order of magnitude and more challenging, but it has to be done. The industry is highly fragmented. There are nearly 600 participants and only four, including Tidewater, have more than…

Thank you, and I'll begin the question-and-answer session. [Operator Instructions] And our first question is from Turner Holm from Clarksons Platou.

Hi, good morning, gentlemen and thanks for taking my call. Quintin, you referenced in your prepared remarks that you see a pathway to acceptable free cash flow, even without significant market improvement. But on that, on the day rate front, I just wanted to ask what you're seeing, especially for the leading edge or what's being tendered now? Is there a sense of continued day rate improvement or does it feel like the market is flattening out now?

Good morning, Turner and always welcome to hear you on the call. Day rates are improving around the world globally, especially in the large growth market. So in the 300-foot class vessel, 1,000 square meter deck vessel, I see marked improvement in those vessels throughout 2019 and bidding activity is currently a step higher as well. So that market is a market that I consider are no longer distressed. It's still a difficult market, but the day rates improvements are progressing. What I'm starting to see now is the next level below that, so called, the 280 class vessel, maybe 850 square meter deck boat, starting to improve in day rate, so moving up nicely behind those larger class vessels. So day rate improvements in those two classes of vessels are continuing to improve. The vessel classes 750 meter and below, the deck base size, I'm still seeing improvement. It doesn't seem to getting any worse, but it is very challenging, and in certain markets, it is getting worse, like Southeast Asia and then, so therefore my prepared remarks on why we're deemphasized Southeast Asia at this time.

Sure. I guess I'm just trying to reconcile the revenue comment in the press release, expectation that 2020 revenue should be similar to levels in 2019 with the sort of underlying market commentary that you mentioned with modest improvement in day rates.

Well, so the active vessel count will continue to move down. So what I see happening in 2020 is us withholding capacity on the marginal vessels, but making up for the revenue on those better vessels and more -- the higher end specification vessels. So what I see happening in 2020 is revenue staying relatively constant, but with fewer vessels and lower operating costs, because fewer vessels are operating today on 2020.

On that, on the active vessel count, you said you see it moving down in 2020. Is that sort of conscious decision on your part, or is that a function of demand?

No, I actually see the broader market improving, so I see the broader market improving. What I'm doing is shrinking market share on the global basis. But I'm shrinking it by reducing our exposure on the low-end vessels. So what I'm trying to do is focus our business on the high-end vessels, on the marginal vessels, on withholding capacity, so I can push the rates up a bit higher and then redeploy them into the market.

I see, I see. Okay. And on those marginal assets, it looks like there is -- I believe it was 40 assets that were mentioned in the press release for scrapping or disposal of some form. What's the main driver of that? Is that removing marginal capacity, so that you might get a bump in day rate and some of the more marginal assets or is it more sort of a cost issue with regards to stacking costs and drydocks and that kind of thing?

Okay, so when I speak about the marginal vessels, what I'm really talking about is, are those vessels that we intend to keep, but the market just isn't right for them to go to reactivate or stay active today. The vessels that we have are assets held for sale. Those are vessels that we're disposing of, because I don't believe that there's any economic rationale for putting those vessels to work. The reason being is that, either the drydock of the reactivation costs on those vessels is significantly high. The remaining life on those vessels is significantly low and the current margins on those vessels are breakeven to mediocre. So reactivating vessels in that class in any foreseeable market in the future doesn't make economic sense.

Understand. And, one of the things you mentioned in your prepared remarks was the fact that some capital providers are wanting par returns and you talked about how challenging that is in the current environment. So I was wondering are you seeing any movement from those capital providers? I mean, it's been a few years since this process started, or I guess what I'm really trying to understand is if there are any, let's call it, reasonably near-term possibilities for larger scale deals like you did with GulfMark, that was very successful? Or are those opportunities still out on the horizon?

Well, capital providers are coming around, and so there is a lot more dialog today about capital providers willing to take a discount to their debt levels in order to get a transaction done, but there's only been a few instances around the world where I could say that that's happened, but at least on banks that aren't primarily in the shipping space, they're willing to take those losses and move on. As it relates to doing another deal like the GulfMark deal, I think there's going to be some opportunities out there. There's not that many large companies, but there are some and there could be the opportunity to do something in 2020, but there's certainly a lot of fleets that are third of the size of the GulfMark fleet, I mean the [20] range that to me can make a lot of sense as well. So there's certainly opportunities. People are starting to come around. It's slower than anybody would prefer, because of all the facts and circumstances around people trying to hold onto their assets, a little bit of self-preservation by management teams as well, but it seems to be coming to an end.

Yeah. Okay, thanks. And then the last one from me is just, Quintin, you referenced how the business model might evolve in the coming years. I'd be interested to hear if there's any examples of that sort of happening now, but then also, any comments you might have around opportunities to invest in sort of operationally similar markets, like offshore wind that could give some diversification and sort of if that's on the agenda, what do you think the timeline could look like? So sort of, yes, the evolution of Tidewater as a business.

The evolution of the offshore vessel industry form a pricing model perspective, it will take a lot of time and it has to be post a degree of consolidation in the market, because the market is so highly fragmented today. It's hard to foster change, because you can't influence enough of a particular market, but I am starting to see some aspects of it. And what I would say from a Tidewater perspective is there's different ways to work around it. For example, if somebody wants to do something significant to a vessel, a major modification or a major mob -- mobilization to a remote geographic area, then they have to pay upfront for that. And we've had three incidents throughout the last year and a half where we've had our customers pay a significant amount of upfront for modifications that they desire as well as mobilization fees. And starting to get more money upfront is a way of changing the business pricing model and my hope is we will continue to see that. I see that customers are willing to do that with a company like Tidewater, because we have the balance sheet and we don't have the existential risk that a lot of companies do have. So as a result, they're willing to spend $2 million to $3 million with Tidewater upfront on a project, because they know that we're going to be here longer term. And so -- so that part of the pricing model is beginning to get pushed a bit, but it will take a higher degree of consolidation and a larger focus. There are certain areas around the world that are already combining vessel forces. And so, you'll see this in areas -- we can see it in Denmark and some other areas, where they are corralling the vessel companies and trying to force a more efficient use of vessel traffic and I see that increasing in focus as we go through the next five years to 10 years. And so my sense is that the evolution of the industry will in fact take some time.

Well, thank you very much, Quintin. I appreciate it. I'll turn it back.

Thanks, Turner.

Our next question is from Patrick Fitzgerald from Baird.

Hi guys. Outside of drydock, what is maintenance capex? You spent $18 million this year. Is that kind of a good level to use going forward?

Hello, Patrick. And outside of drydock, capex is modifying the vessel for a particular venture. Yeah, but just finishing up the turnaround, I was talking about three examples of where we made a significant investment in a vessel because it was -- we got a significant upfront payment from the customer. Those modifications to the vessels are not drydock, they're considered capex. So anything that modifies the revenue generation capacity of a vessel or extends its useful life, and it's usually the former, is categorized as capex. I'll take advantage of opportunities when customers are willing to prepay capex, but absent that situation, I don't think capex being more than about $5 million for -- I'm sorry, $8 million for 2020.

Okay, thank you. And you said you had -- in the press release you had $440 million contracted backlog today. Where were you at, at this point last year?

So our new information systems are allowing us to gather this information. So, I don't have a comparable figure to last year.

Okay, but you expect revenue to be roughly flat, I guess. So, I guess the -- you don't have the information to say one way or another, but your sense is that it's flat with last year? You would have $440 million contracted last year?

Because we didn't have the same information system in place -- I can't tell you how much I had contracted last year at the same time, under the same definition. So, I can't give you that comparable figure in any reliable measure, but this degree of contract coverage for the prompt year, for the upcoming year is unusually high. So, going into this market, my intention is to lock up in the near term, but not in the long term, because I do see rates increasing. So, it's not atypical to have 60% of your forward year contracted in a normalized market. What we've done throughout 2019 is a lot of things are primarily through the softer period in 2020, so, call it, the first one. And then, leave some spot exposure, as we'll see fully in the summer months and a little in the fourth. [Indiscernible] I'm overly concerned about because the markets where we have spot exposure, I'm very bullish on this, particularly the North Sea.

Okay. Yeah, kind of just another question on the consolidation front. I mean, thanks for your comments. They were helpful. So, I mean if you see this new world of companies like Tidewater dominating certain markets and being out of others, how many markets would you expect to be in, like North Sea and West Africa or is that kind of how you see it?

Well, right now, the only thing that I would say is on de-emphasizing Brazil and Southeast Asia. So, of the markets around the world, the U.S. Gulf of Mexico is still decent market. The market in the Southern Caribbean is a very strong market, it's a small market. Mexico is a decent market. We'll see how it evolves over the next couple of years. So, the continent of Africa and the North Sea, I'm more bullish on, because I see those markets tighten. So, the Mediterranean, the North Sea and Africa, those areas seem to me no-brainers and continue to concentrate in and make sure that our businesses is focused on. The areas like the Gulf of Mexico and Southern Caribbean to me are still very good markets and I don't see a reason to get out of them at all. As it relates to Brazil, it was lower returns and in the Southeast Asia, that's a market where you used to make a tremendous amount of money in Southeast Asia. It's very business-friendly environment, but it's just so oversupplied with vessels today and it's relatively lower spec tonnage that I don't expect that market to come back. That is not a market that I wouldn't go back to, but when we're talking about the regional super consolidators, there's a few people that are in the same position that Tidewater has, where we can leverage ourself across the global footprint, but it's important to concentrate in some key areas and concentrate in the North Sea and Africa will be great for us, but I wouldn't -- I wouldn't put ourselves from concentrating in the Gulf of Mexico as well.

Okay. And then, sorry, one more question, just on the $39 million assets held for sale. I don't know you're -- did you -- are those going to be mostly from the markets that you are de-emphasizing?

There are vessel categories that we're -- so they're not necessarily. Some of them are naturally, but really it's the older lower spec tonnage [indiscernible] specification for continuing to maintain and that's around the world, yes.

Our next question is from Ceki Medina from Southpaw.

Thank you very much. Can you hear me?

We can, Ceki. How are you?

Good, thank you very much. Congratulations on the good results. I have a question about the markets that you're tied to and the rig space. The ultra-deepwater market is improving much slower compared to jackups. So I was wondering if you could give us an idea about which one you are more exposed to these days. Do you have a sense of what kind of rigs your vessels are working for in, certainly around the world, but also in different markets, just roughly? Thank you.

Absolutely, Ceki. And -- so let me start by talking to you about how I see the demand equation for the offshore vessel industry. Historically, it's been about 50% of the activity that we do is just basic production related, not very sophisticated vessel work, but very important vessel work, very reliable vessel work. And with a downtick in drilling, that's now 60% to 70% of our business is just basic production activity and those vessels are operating in that format throughout the world. The remaining 30% is, of course, drilling and other construction projects as well. And of course for us, it's more important for the floater industry to improve from a per vessel basis. So, floaters have a more significant improvement in demand -- increasingly more significantly than the jackups just because usually, they're part of their field, they take more supplies, there's more vessels in circuit supporting those types of offshore units than it is to the jackups. Today though, because there hasn't been that much improvement in the floater market, we're still mostly exposed to the jackup market. And so, around the world in the areas that we see things improving, we do see incremental improvement in the floater market as well, but the substantial improvement in the jackup market has helped us more.

And we have no further questions at this time. I will now turn the call back over to Jason Stanley for closing remarks.

Thanks, John. Thank you everybody for your time and your interest in Tidewater. As always, if you have any follow-up questions, feel free to reach out to me and have a great day.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.