Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Incorporated Q3 2023 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to West Gotcher, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Eric. Good morning, everyone, and welcome to Tidewater's Q3 2023 earnings conference call. I'm joined on the call this morning by our President and CEO, Quintin Kneen; our Chief Financial Officer, Sam Rubio; and our Chief Commercial Officer, Piers Middleton. During today's call, we'll make certain statements that are forward-looking and referring to our plans and expectations. There are risks and uncertainties and other factors that may cause the company's actual performance to be materially different from that stated or implied by any comment that we are making during today's conference call. Please refer to our most recent Form 10-K and 10-Q for additional details on these factors. These documents are available on our website at tdw.com or through the SEC at sec.gov. Information presented on this call speaks only as of today, November 7, 2023. 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 financial measures can be found on our website at tdw.com and is included in yesterday's press release. And now with that, I'll turn the call over to Quintin.

Thank you, West. Good morning, everyone. Welcome to the third quarter of 2023 Tidewater earnings conference call. In my prepared remarks today, I'm going to focus on our success of integrating the Solstad fleet, discuss the share repurchase program that we announced yesterday and how that fits within our broader capital allocation framework, and then provide some highlights of the third quarter and on our outlook for 2024. Piers will give you more detail on the markets around the world, and then Sam will explain the financials in more detail and provide some more specifics on the 2024 guidance. Quarters in which you integrate a large acquisition are readily as eloquent as one would prefer. So another objective today is to provide you with some information that allows you to bridge the balance sheet and income statement movements resulting from the acquisition. We announced the completion of the 37 Solstad vessel acquisitions shortly after the end of the second quarter. We are thrilled with the quality of the vessels and the more than 1,000 personnel who are now a part of Tidewater. We remain excited about what the addition of this high-specification PSV fleet means for our shareholders over the coming years as the market continues to recover. The team here put in a lot of work prior to the closing to ensure that Tidewater's regulatory, administrative and information technology systems were adequately staged and prepared to accept the vessels and that we were ready for the required customizations and configurations to the onboard operational applications for the equipment on the newly-acquired vessels. Given that these vessels are all active, the physical integration process has transitioned 1 vessel at a time, and a schedule was designed to roll in vessels over time as they become naturally available to go through…

Thank you, Quintin, and good morning, everyone. Before I talk about each of our region's performance, I will give a quick update on our perspective of the overall market and touch on a couple of themes we continue to focus on that we believe are important to maintain the long-term growth of the company. The outlook for the sector remains positive with market positivity being driven by the continued upturn in project investment, a supportive energy price environment, firm demand and ongoing constraints in fleet supply with demand momentum expected to build further into 2024 and 2025. None of the regions in which we operate are seeing any signs of slowdown at the present time. Rig rates and demand continue to improve with Clarksons Research reporting that demand has firmed by an additional 3% so far this year, driven by continued improvement in the Middle East. The number of active jack-ups rose to 158 units in the Middle East, up by 37% since the start of 2022, and demand is expected to increase by a further 10 rigs by the end of 2024 just in the Middle East. In addition, the MOPU sector remains very positive with a total of 15 new build and conversion contracts projected to be awarded in 2023, driven primarily by strong activity in South America, with a further 17 new build and conversion MOPU contracts expected to be awarded in 2024, totaling an estimated $16 billion of contract investment in 2024, which is close to the record high seen in this sector in 2022, all very positive indicators for the long-term health of the OSV space. On previous calls, we've been very clear about focusing on certain key tenets, as the market rebalanced, to enable us to maintain the long-term growth of the company. 2…

Thank you, Piers, and good morning, everyone. At this time, as in prior quarters, I would like to take you through our financial results and I will focus primarily on quarter-to-quarter results of the third quarter of 2023 compared to the second quarter of 2023. The third quarter results were impacted by 2 significant events. On July 5, we completed the acquisition of the 37 platform supply vessels from Solstad for $594 million. We financed the acquisition through a combination of net proceeds from a $250 million 5-year 10.375% fixed rate unsecured Nordic bond, a new $325 million 3-year SOFR-linked floating rate amortizing senior -- secured senior bank term loan, together with $18.5 million of cash. More details of the financing are available in our recent 10-Q filed yesterday. In addition, the steep increase in the value of our common stock in July resulted in previously out-of-the-money warrants becoming exercisable prior to the expiration on July 31, 2023. This resulted in about 1.9 million shares of stock issued for a total of $111.5 million. As noted in our press release filed yesterday, we reported net income of $26.2 million for the third quarter or $0.49 per share on revenue of $299.3 million, compared to $22.6 million of net income or $0.43 per share in the second quarter on $215 million in revenue. In the quarter, the acquisition of the Solstad vessels played a big role in the increase in revenue. Active utilization also increased, which contributed to the increase in revenue. Active utilization increased from 79.4% in Q2 to 82.1% in the current quarter. The utilization increase was driven by higher utilization of the Solstad vessels, lower mobilization days, offset somewhat by slightly higher drydock and down for repair days. Also contributing to the increase in revenue was an increase…

Well, thank you, Sam. Eric, we're just going to go ahead and open it up for questions.

[Operator Instructions] Your first question comes from the line of Jim Rollyson with Raymond James.

Quintin, on the cost side of things, obviously, you mentioned a few different things went up sequentially because of Solstad addition, but part of this was the vessel downtime and costs associated with that. Just trying to frame up maybe how to think about your costs kind of on a per day basis as we move forward into the rising rate environment, rising utilization environment. Does this start to normalize at these kind of levels? Or do you think once you get through that kind of rush back to work on a steady basis that things will eventually come down somewhat on a per day basis? I know it's embedded in margin guidance but trying to think about that as we go through the next several quarters in a much higher rate environment.

Right. No, thanks. So there's a couple of things unique to the quarter as it relates to the integration of Solstad, right? So, one was, they're just naturally higher-cost vessels. So the average moves up a little bit, the baseline moves up just because those vessels are larger vessels and they operate in more expensive areas around the world like Brazil and Australia, as well as the North Sea. Then we had some one-time costs associated with just going through the process of the integration that I was alluding to earlier, and I think that was about $4 million in total. And then, the unknown was, we had about $6 million of costs related to vessels that went down for repair that we weren't anticipating. And I attribute that to just teething issues related to reactivating the entire fleet back in 2022. So right now, we're in a great position where we can push costs through to our customers. And so, that's -- the upside here is, as the cost base changes, we're able to push it through to our customers and we're trying to push it through as fast as possible. I don't think -- you're not going to see the economies of scale on the per boat basis that we see on the G&A basis naturally. So I think that embedded in the '24 guidance on inflation is about 6%. It gets us to about $8,500 per day. That will eventually just move with the general price level movements. But my hope is that at the end of the day, this is all about improving margins, and then we can push all of that through to our customers as we go through '24.

Right. And so, if we think about what you just said in relation to the 52% kind of gross margin guidance, I presume that gradually, across the year, as rates are moving up, costs are not necessarily moving up in proportion. So that 52% is the average for the year, but your quarterly run rate is going to be expanding as the year goes on. Is that...

Yes, absolutely. And I think -- my hope is that there is also a disproportionate push-up in day rates because quite frankly, we're still not earning our cost of capital. So I am pushing up day rates just to get my cost of capital and I'm layering in on top of that any cost basis changes as a result of the cost structure.

Perfect. That's exactly what I thought. Okay. And then, just one follow-up on the duration side of things, you guys have obviously been purposely keeping duration relatively short because we're in a rising rate environment. I think you've mentioned 10 months this quarter. It was 6.5 months. I think it was 7 or 8 months in the quarter before that. At what level of rates or margins or returns on capital do you start to think about locking some things up on a little bit longer-term basis?

Well, I'm still optimistic right now on the business that I don't want to lock up. But I know that there is a prudent level of going long and short on your fleet that any business should address. But to me, it's really based on the outlook. I continue to see the supply and demand factors so strongly in the vessel owners' favors that I don't want to lock up. But on the lower-end tonnage -- so like these longer-term contracts that we locked up in Q3, they weren't like lower-specification tonnage. [ Or anything like ] 220 vessels, not that every vessel is the greatest vessel ever built. And so, on the lower side of this specification spectrum, I don't want to lock those up for long, and that's what I did in Q3. There certainly is a point, longer in the cycle, where you start locking up because of just prudency, because of cycle perceptions, the changes in the cycle and so forth, I just don't see that in the foreseeable future.

Perfect. Looks like that's going to be next year for sure. Appreciate it.

Your next question comes from the line of Greg Lewis with BTIG.

A question for you. Realizing this was a quarter of integration, Quintin, any kind of rough guidance you can give us around, as we're looking at the larger PSV segments, as maybe where the Solstad fleet may be kept a lid on pricing in terms of reported day rates versus maybe where it was additive, if at all?

Yes. No, there is definitely a mix. The Australian contracts that we inherited were definitely below market. We priced it accordingly, but they were below market. So when they roll off in the next year or year and a half, that should reprice quite nicely. And then, generally in the North Sea market, it's been fairly fixed. Half of it's going to roll over by the end of 2024.

Okay. And then, I did have a question around that -- you called out the $6 million of kind of unplanned costs during the quarter. Was that related to a few vessels or a few handful of vessels where, as you're reactivating them previously, they had to come back? And any kind of color around that and how we should...

Yes. There's about 7 in total. And I think most of them were in the Middle East this quarter, although they were somewhat spread out. We had one in Brazil as well. Unfortunately, when you put a boat to work, you do everything you think you need to do to make sure that the boat is sound. But when the equipment hasn't worked in a while, you just never know what balance is going to break or what piece of moving equipment no longer moves. So we have some teething issues that we're working through. It is temporary. You go through this, and I think we probably have another 3 or 4 months of it. I've budgeted it into the guidance that we put into the Q4 and into '24, but my hope is that we'll be able to improve upon that even sooner than that.

Okay. Great. And then, just one final one for me. As we think about the fleet, the contracted fleet, I guess, we're in the middle of Q4, are there any kind of pressure points in terms of the seasonality of the market where we should expect an outsized number of contract resets in any specific quarter as we look out over the next 12 months?

Well, generally Q1, we see most of the resetting occur because there's still a lot of companies that contract on a calendar year basis. So you might see more in Q1 as we go through it. But let me hand it over to Piers. Piers, can you -- are you seeing any changes in the seasonality patterns over time?

No. Not that we haven't seen in the past. When you get the North Sea obviously comes through into the summer season, so there's always a Q1 play, and a little bit, as I said earlier, because we have a fleet in the Asia Pacific, where we picked up quite a lot of work in Taiwan, that's a -- [ certainly ] is a sort of Q2 -- Q1, Q2 starter story as well. But no, it is not particularly seasonality. It's more of Q1 is where we will see a lot of the contracts coming through for next year.

At this time, there are no further questions. I will now turn the call back over to Quintin Kneen for closing remarks. Please go ahead.

Thank you, Eric, and thank you, everyone, for listening. We look forward to updating you again in March. Goodbye.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect your lines.