Welcome to the Earnings Conference Call Second Quarter 2020. My name is Sylvia and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Jason Stanley. Mr. Stanley, you may begin.

Thank you, Sylvia. Good morning, everyone and welcome to Tidewater’s earnings conference call for the quarter ended June 30, 2020. I am 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. During today’s call we will 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 may 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, July 31, 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 will turn the call over to Quintin.

Thank you, Jason. Good morning, everyone and welcome to the second quarter 2020 Tidewater earnings conference call. Allow me to start off by making a few remarks on the ongoing pandemics impact on the shipping industry. I’ll then discuss how we are doing on executing the plan we outlined on the first quarter call and provide some updates to our outlook for the remainder of 2020. Finally, I will cover our consolidated quarterly results highlight some noteworthy items in our operating segments and then we will open the call up for questions. On our two most recent earnings calls, I mentioned the critical role the international travel infrastructure plays and moving our mariners around the world as they embark and disembark our vessels. There are over 50,000 ships around the world of all different types and today an estimated 200,000 plus mariners are stranded on vessels and in need of repatriation. I’m taking a moment on today’s call to highlight their flight, as they appear to have been forgotten by the government’s rushing to address the more obvious concerns manifested by pandemic. Shipping moves 80% of the global commerce and as an essential part of keeping the global economic recovery going. So my call to action is this, please join us in supporting the formal recognition of these individuals as key workers. This would exempt mariners from travel restrictions and enable them to travel to and from ships. Groups like the International Chamber of Shipping, the International Maritime Organization, the International Labor Organization and the International Transport Workers Federation are all championing this issue. To the extent that you can help us cause, I urge you to do so. When we last spoke, I outlined our revised outlook for 2020 and our performance in the second quarter was consistent with…

Thank you. [Operator Instructions] And our first question comes from Turner Holm from Clarksons Platou.

Hey, good morning, gentlemen, Quintin and Jason and rest of the team, congratulations on, I think what was a pretty decent performance and obviously incredibly challenging quarter and maintaining sort of cash flow positivity. I think it’s commendable so congratulations with that.

Thank you.

And just I wanted to get a little bit of a feel for the underlying performance of the business, Quintin, and there is one thing that popped out of me in the numbers and that was just the deepwater Americas segment, I thought that was up about $5 million sequentially in terms of revenue. Was there any like termination fees now or is that just reflecting the underlying performance of the business?

No, but certainly, call it out, Turner, if there were. That is just increasing activities in the Southern Caribbean so that area that’s been a relatively positive and relatively bright spots around the world, which is kind of Trinidad, Suriname, Guyana. We had some boats going on higher in that region and they can – they were scheduled to go hire and they went on hire as scheduled.

Okay, great. I appreciate that the color. And then, just wanted to touch on business plan that you outlined in your prepared remarks and really just I guess on the revenue perhaps first, two things, really is just the sort of assumptions. I was wondering if you might provide us a little bit additional color on how you all kind of think through the revenue performance for the rest of the year. Is it just sort of assuming the contracts that are already sort of booked, roll off on the spot rates and then there is some spot utilization level, so kind of any color around the flex and sort of upside-downside risk to that sort of revenue number? And then I guess maybe just the interesting to hear your broader thoughts on how the business feels like its stabilizing or maybe not stabilizing. So that was the question.

No, fair – good and fair question. So one thing I didn’t mention in the prepared remarks is that the backlog for the second half of the year is approximately $150 million. So we start with backlog as a base. When we look at that revenue forecast for the remainder of 2020. And then we make some assumptions as to contracts that have options that we believe will be executed, and then just some general spot activity. Now, I am not really expecting any spot activity in the third quarter. Just because we are in this transition phase where everyone E&P companies are and the like, all of our customers are reassessing their plans. But I do have some budgeted spot exposure in the fourth quarter. Normally the fourth quarter is a bit of a tick down because they – it’s usually driven by the North Sea market because of the weather based calendar and your seasonality there, but those operations are already down significantly. So I don’t see, we are going to, I don’t think we see as much of a pull back in the North Sea in Q4 as we normally would and then expecting a little bit more increase in some of the better areas around the world.

Okay. So you guys feel like this is a pretty conservative view of how the world looks over the next 6 months?

Yes, definitely.

Okay, great. And then just on the cash flow piece, I know it’s quite early to think about next year just given the fluidity of the situation, we are all living through. But in terms of cash flow, the vessel disposal piece is pretty meaningful and I just wondered if you kind of think about the fleet is the $40 million level that you are thinking about for this year? Is that something that could continue for another year at that level or is that a bit lower or a lot lower, kind of what is the deserve fleet rationalization and sort of cash flow conversion out of that look like as you kind of think forward for the next year or so?

Well, as implied by some of the numbers I threw out there, I am expecting about $19 million in the remainder of 2020 from asset sales and then I am looking for another $10 million in the second half of 2020. But if we get to the point, what I am anticipating we will see is a bottom in the Q4, Q1 timeframe. I do see indications that people are rethinking their plans for ‘21 that the [Technical Difficulty] back that people did in the second quarter and really into the early part of the third quarter are being revisited and so my anticipation is that we are going to see a bottom and activity in the first quarter of next year and then slowly increasing throughout ‘21. I think we are not going to be back to where we were before this crisis began by the end of ‘21, but we will be – I think we will be close, that’s my expectation based on activity levels and projections today. So my belief is that we will be through the asset disposal program, and I won’t need to dispose of any additional vessels in the second half of ‘21. Now if that doesn’t come to fruition, and we will update our guidance on ‘21, Turner, when we do the Q4 call, but as I think about ‘21, if it were not to stabilize, we can pull back. I would add additional vessels naturally into the asset held for sale category because that tends to indicate to me that these vessels, the lower, but marginal vessels aren’t going to be profitable.

Sure. I get that and thanks for that color. And I just think one more question from my side is really just turning to the balance sheet and your latest thoughts there. I guess the cash number has increased a little bit from the previous report, so that’s good. And then in terms of compliance with the covenants and I know the bond is still 3 years out in terms of maturity, but these things usually get addressed well ahead of their maturities. Can you just kind of remind us of your – so latest thoughts about the balance sheet and especially that bump?

Right, well, thanks. So I am definitely not worried about covenant compliance. When we modified the indenture in the fourth quarter of 2019, we stretched out the financial covenants and so, I am actually not worried at all on financial covenants. When it comes to refinance or refunding that, you will have to see. The reality is, we have got enough cash on the balance sheet today to pay off the bonds, okay. And my intention is to continue to generate cash, but there is a significant make-hole on those bonds. And so you know paying them off early, it may not be economic. So we will have to deal with that as we go through ‘21, but I am sitting with the cash on the balance sheet and commensurate amount of debt outstanding. I am not going to be passed by it, even if it goes current.

Okay. Well, I think that’s all from me Quintin and again, I think it’s fair to say that you guys did a really good job in a tough quarter. It’s not usually my style to say that, but I think in this particular case, I think it’s warranted given the level of difficulty you all must have been dealing with. So yes, congratulations on a commendable performance and thanks for answering the questions.

Absolutely. Thanks, Turner.

Our following question comes from Patrick Fitzgerald from Baird.

Yes. Hi, guys. So the $150 million in backlog for the remainder of the year, what’s kind of the cancelability of that if we see another kind of plunge in prices, let’s hope not, but to the extent that happens, are these kind of like plans or these like firm contracts?

Well, there is no take or pay contracts are very few in that mix. They all have cancellation provisions. Most of the activity declines have 30 to 90-day cancellation provisions. That’s why when things got canceled in the beginning of Q2, we are starting to see them come off higher in Q3, but it’s certainly our best guess as to what the revenue will be – best estimate of what the revenue will be for the second half of 2020.

Okay. And then the North Sea, I mean obviously, you guys had a good quarter given the circumstances but the North Sea was a little bit more challenging, it looked like. Could you just – maybe that was just kind of expected to happen beforehand, but could you provide a little bit more color on what happened there? Were a few major contracts canceled or any color on that would be helpful?

Okay. So normally you see an uptick in the second quarter and the third quarter and the North Sea market. If you usually – the summer work season and as a result, Q3 and Q2, are stronger than Q4 and Q1, and Q1 usually being the weakest, okay. So, no, it’s not planned to have that type of down on the tick in the North Sea market. However, that is the most volatile market in the world, the North Sea market. It collapses faster and it recovers faster than any of the other markets. So it did –we also significant number of high dollar contracts in that area of the world, principally in the UK sector and to some extent, into the Mediterranean as well. We had a few boats that were anticipate is going on hire in the Mediterranean that did not go on hire, that regions and Mediterranean UK sector and Norwegian sector. Norwegian sector held on – initial held on through Q2 uncertainties some weakness in Q3, but no, the boats that operate in that market, are some of the most capable boats in the world. So when they go off hire, they don’t go off hire for too long. They generally get redeployed into other areas of the world that are looking for those higher specification vessels or willing to take them at a discount, which generally happens in this point of the cycle. So, yes, it is a downtick in Q2 in the North Sea sector that wasn’t anticipated when we budgeted the year. It’s a volatile sector that I am used of that type of volatility through the downturns. My anticipation is of those vessels in due course will get redeployed. Those are no the vessels that I would say move into the, the asset held for sale category because those are the vessels that generally will be in demand around the world.

Okay, alright. Thanks. And then, you had 138 active vessels in the quarter, how do you see that kind of working out – that number working our in the future – near future I guess? And is there any, I mean your fleet is obviously – the size of your fleet has come down significantly. Is there any metrics you can provide on kind of what’s remaining like average age, I would imagine has come down significantly, maybe deadweight ton capacity, anything like that would kind of highlight the – what’s remaining in the fleet?

So obviously with the pullback in revenue that we are anticipating for the second half of 2020, that 138 will continue to go down, okay. Where it lands at the end of Q4 is really difficult to say at this point. There is still a lot of factors to influence that outcome. But I can see that number down 15 to 20 vessels in the next 6 months for sure, okay. As it relates to the average age of the vessels, the average age of the active fleet today is just under 10 and the average age of assets in the held for sale category is just under 13, okay. So that to kind of give you some metrics on that. On our deadweight ton or on a linked basis, I am sure Jason can get that for you. I don’t think of it in those terms it’s not as relevant to me. I will tell you that disproportionately they are going to be the younger larger assets that are in the active fleet and generally it is going to be often the smaller and older tonnage that is in the assets held for sale category.

Okay. Could you remind us or me of what are your options with the restricted cash after the amendment do you have to make par offer, can it be below par?

Well, there is the indenture has a bunch of permutations and calculations that we have to go through. There is a – I know there’s a portion of it that gets offset by CapEx and some other IPs. So, but eventually once you hit those elements you have to go out at a par offer, I believe.

Okay. So would it be around the $20 million that you have in restricted cash now, you would have to go out with a par offer eventually?

No, there is a threshold that you have to get to before you’re required to do that. I think that’s – I think its $25 million. I have to check the indenture, not sure.

Okay. No, thank you. I appreciate you answering all the questions.

Of course.

Your next question comes from Peter Ehret from ERF.

Hey, good morning. I reiterate the comments a good survival skills and much appreciated. So the – so question about just where these ships that you are losing, where are they going, is that just to scrap market or is that just latent capacity for somebody else?

No. It’s disproportionately to the scrap market. To the extent that we are getting out of our vessel class, like we have generally gotten out of the, the crew boat class of vessels in the United States. So if I sell those into other areas in United States. I will do that just because it does not, it doesn’t impact the strata of demand for the – my core set of vessels. So if it’s settling into an area that we don’t operate in or a vessel class that we don’t operate, then I will sell it into a continuing operations, but generally it’s going into alternative markets or the scrap market.

Okay. And then one other ideas as a part of the space and for your company has been consolidation and some moves or some changes that impact industry structure itself. Can you talk about that at all. I just what is going on with competitors, is that moment upon us where we can see some, some consolidation and some change in industry structure and what your potential participation or even leadership in that might look like?

Yes. So I’m a big fan of consolidation in the industry. I think it is an important part of rationalizing the global fleet, okay and I see consolidation as I step into focusing as well. Companies like Tidewater have been everywhere and my intention is to pull back an areas that I’ve previously mentioned, I did not mention on this call but pulling back out of Brazil or pulling back out of Southeast Asia, you heard my comments earlier on Nigeria. So certainly I believe the vessel companies need to focus in a particular areas, maybe one, maybe two, maybe three, that depends on the size of the fleet. And so I am looking to participate that and lead through that in any way that I can. The difficulty today is that, aside from us, most – every company out there has a toxic level of debt and the debt holders are not willing to let go our reasonable prices. So when I think about my outlook over the next couple of years, I certainly believe that we’re going to see an increase in demand, as we go through the next 18 months, okay. And I want to make sure the step one, we get there, and that’s why I am very focused on managing the cost structure and managing the vessels that are operating, so that we continue to be free cash flow positive, okay. And then step two is, I don’t want to dilute myself before I get to the upside. And so I don’t want to do anything that alters my ability from my equity holders to reap the benefits of going through all this pain. And so looking for the right deal is key, unfortunately a lot of that consolidation that I think would naturally otherwise occur, is being held up by capital providers that are not willing to take the right price for their assets.

Okay. Have you seen more assets migrating to banks? So you just, I guess it’s kind of sounds like hey, we are on so maybe the verge of some formal restructuring processes, but not quite there yet. Is that fair? And obviously once something’s restructuring a bank is taking things back or whatever right?

In think that – I do believe that – I will take you back to fourth quarter of last year, right. I think everyone was looking at an up projection of increasing utilizations and day rates and banks and capital providers at the time, we’re of the opinion that they just have to hold on a bit longer in order to get par returns, if you will, you know thereabouts. There is pullback in those spring has – I think pushed a lot of people over the edge, which, to your point, and maybe the [indiscernible] certain capital providers, I haven’t seen it happen yet, but I hear more dialog about it happening. So, we – like you said, we may be on the precipice of this, and I look forward to taking advantage of those opportunities, but from an action standpoint, I haven’t seen it happened yet.

Okay. Alright, good. Thank you.

Thank you.

We have no further questions at this time.

Okay. Thank you, Sylvia. Thank you everybody else for attending the call this morning. We hope you have a safe rest of your day and a good weekend.

Thank you. Ladies and gentlemen this concludes today’s conference. Thank you for participating. You may now disconnect.