Tidewater Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 7 speakers on the call.

Operator

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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the call over to Wes Gojer, Vice President of Finance and Investor Relations. Please go ahead.

Speaker 1

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, Quentin Neen 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.

Speaker 1

Please refer to our most recent Form 10 ks and 10 Q for additional details on these factors. These documents are available on our website at tdw.com or through the SEC@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.

Speaker 1

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 Clint.

Speaker 2

Thank you, West. Good morning, everyone. Welcome to the Q3 of 2023 Tidewater Earnings Conference call. In my prepared remarks today, I am going to focus on our success in integrating the Solesad 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 Q3 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.

Speaker 2

Quarters in which you integrate a large acquisition are rarely 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 acquisition 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

Speaker 1

this high specification PSV fleet means for our

Speaker 2

shareholders over the coming years as location 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 the roughly 1.5 day change of management procedure. As of today, we have completed 32 of the 37 vessels through the full change of management procedures and these vessels are fully integrated onto the Tidewater Administrative and Technology Infrastructure. The scope encompasses the vessel's fleet wide systems and onboarding vessels to Tidewater's HR, crewing, payroll, financials, purchasing everything, AP, customer billing.

Speaker 2

We currently expect the remaining 5 vessels to be completed by the end of the month. And I want to extend a special thank you to the Tidewater and Solset teams, as well as our 3rd party providers such as Unisea and Ocean Technologies Group who are all involved and dedicated to the successful integration. This is an amazing global team accomplishment to successfully transition all 37 vessels within 5 months of their acquisition date. The Solstad acquisition transaction was an asset purchase, so it lent itself to a more streamlined realization of G and A synergies as we didn't have to onboard any personnel not immediately pertinent to the supporting the newly acquired fleet. That dynamic Played out as expected and now that we have a substantial majority of the vessels inside of our infrastructure, we now expect the incremental Annualized G and A for the new fleet to be about $3,500,000 as compared to our initial view of $5,000,000 resulting in implied G and A synergies of $14,300,000 and an incremental per day G and A cost per vessel of $2.60 per day.

Speaker 2

This is simply unmatched in our industry. The company's debt agreements allow for the repurchase of up 50% of the company's trailing 12 months net income beginning on November 17, 2023. Accordingly, we announced The press release that our Board of Directors has authorized the company to repurchase up to $35,000,000 of our outstanding common stock, which is the maximum we can do at this time under those debt agreements. We will update the repurchase program quarterly based on our utilization of the program and the permitted amount We are pleased to be in a position such that we are generating meaningful free cash flow and are able to institute the share repurchase program. Given the long term outlook for the industry, we believe that the intrinsic value of our shares is well above the current trading value.

Speaker 2

As such, we view the share repurchase program as another investment option we have to maximize value to our shareholders in addition to value accretive acquisitions and the solid execution of our business. Until we establish a long term debt capital structure that is better matched to business, we will limit our repurchases to the maximum of what is allowed under our debt agreements, which is currently 35,000,000 or to the anticipated net cash position 6 quarters out. Value accretive acquisitions remain our first priority on capital allocation. It's difficult to predict if or when any value for your deals can be completed, but we will balance the share repurchase opportunity with the opportunities from acquisitions. Our philosophy will be to evaluate the return on any given acquisition to the return on share repurchases based on our view of the intrinsic value of the business.

Speaker 2

The positive momentum in the offshore vessel market continued during the Q3. Tidewater continued to benefit from the global uplift in day rates driven by the increasing demand for vessels and tight vessel supply, with day rates up over $1800 per day and 11% movement from the last quarter. This is the largest absolute and percentage sequentially quarterly day rate increase since the recovery began. The average day rate is up now approximately $7,200 per day or nearly 70% since the recovery began around the end of 2021. Every region and every vessel class experienced a modest to quite significant day rate increases during the Q3, which speaks to the global tightness in vessel supply, driving day rates for every vessel class.

Speaker 2

The global uplift in our day rates is comprised of 2 major factors, the first of which is older contracts rolling off and re contracting at prevailing market rates, allowing us to continue to mark to market our fleet. The second factor is that leading edge term contracts continue to move meaningfully higher. During the quarter, we executed 27 term contracts with an average rate of approximately $28,600 per day, with the new contract distribution essentially in line with our vessel distribution. This compared to the leading edge day rate in Q2 of approximately 23,500 per day. This represents a nearly 22% sequential increase in leading edge term day rates, essentially double the rate of sequential growth from Q1 to Q2.

Speaker 2

Further, the Q3 leading edge term contract day rate was approximately 60% higher than the Q3 printed day rate. There's always a trade off between utilization and day rate when you're holding out for the best prices and this quarter it more than worked out. We're still contracting short, but the average Duration of the new contracts in the Q3 was approximately 10 months, slightly higher than the 6.5 months in the Q2. The uptick in duration is attributable to a few long term contracts for some of our smaller tonnage and lower specification vessel markets. As we have talked about in the past, there is an iterative process as day rates reset.

Speaker 2

When one boat class moves up as the day rates increase, customers will begin to look to find adequate substitutes in adjacent vessel classes where appropriate for the given work scope. As dayrates in the smaller vessel classes approach parity with larger vessels, larger vessels have taken the next leg up. We saw that dynamic play out this quarter where the most relative day rate improvement came from the mid and small vessel classes. We are encouraged by this dynamic as is the natural progression of day rates across the vessel spectrum in the supply constrained environment. We anticipate that as we enter the more active tendering part of the calendar in the Q1 that we will continue to see daybreak momentum in all of our vessel classes.

Speaker 2

For the Q3, revenue increased 39 percent to $299,000,000 compared to $201,000,000 in the 2nd quarter and ahead of the Q3 revenue guidance we provided on quarter's call. The revenue growth was driven by the vessels acquired from Solstad, but also by higher than anticipated day rates and a nice expansion in utilization, up over 2.5% sequentially to 82.1%. Utilization was below the expectation of 84% we laid out in the last quarter's call due to more time down for repairs than we had estimated. Gross margin was up 1% excluding the $4,000,000 of one time charges associated with the Solstad integration. We were pushing to be up 5 percentage points, but the additional time down for repair decreased revenue and increased costs.

Speaker 2

The 2% of excess downtime this quarter costs us $6,000,000 in revenue and $6,000,000 in costs, which would have been another 3 percentage points of gross margin. It's not uncommon for vessels to experience higher downtime as newly reactivated vessels return to high surface intensity after a period of low to mid level intensity, but our recent experience has been higher than we anticipated. As we look forward to the Q4, we expect revenue to increase to 309,000,000 The sequential revenue increase is 95% covered by existing backlog with the remaining 5% anticipated to be picked up on spot work throughout the quarter. The guidance reflects 84% utilization. The risk to this guidance is unanticipated downtime and unanticipated weakness in the spot market.

Speaker 2

Sam will give you more details on our 2024 guidance, but our initial revenue guidance for 2024 reflects a year over year average day rate increase of over $4,000 in excess of the day rate increases we saw throughout 20222023 and well above the prior cycle annual increases of $1500 per day. In summary, we are very pleased with the continued momentum across our business with revenue, margins, day rates and utilization all continuing to move up. We are particularly pleased with the day rate progression across all of our regions and vessel classes and the integration of the newly acquired Solstad vessels. We remain highly confident that secular themes of the global shortage of vessels combined with increasing demand from A variety of demand drivers including drilling, subsea construction, existing production and offshore wind will continue to provide vessel owners with the ability to push up day rates and improve contractual terms as we go through 2024 and beyond. And with that, let me turn the call over to Piers for an overview of the geographic markets around the world and more color on the performance of individual vessel classes.

Speaker 3

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 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, 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 Clarkson Research reporting that demand has firmed by an additional 3% so far this year, driven by continued improvement in the Middle East.

Speaker 3

The number of active jackups rose to 158 units in the Middle East, up by 37% since 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 newbuild and conversion contracts projected to be awarded in 2023, driven primarily by strong activity in South America, with a further 17 newbuild and conversion MOPU contracts expected to be awarded in 2024, totaling an estimated $16,000,000,000 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 tenants as the market rebalanced to enable us to maintain the long term growth of the company. 2 of those tenants revolve around discipline on how and what we bid for and the flight to quality of our fleet composition. With the Solstad acquisition complete in Q3, We continue to focus on the flight to quality of the fleet, and we now have a total of 2 20 ships in the Tidewater fleet, of which 197 are OSVs and 65% or 127 OSVs including all the 37 Solstad PSVs are high specification larger deck PSVs where over 16,000 BHP anchor handlers.

Speaker 3

These higher specification vessels are the class of boats that are primarily driving charter rates in the global market today. So the addition of 37 large deck, high specification PSVs has further enhanced our ability to leverage not just OSV rates globally, but also contract terms to support the long term growth of the business. Discipline is another key tenant. And whilst a lot of our focus since the recovery began at the end of 2021 has been on pushing up day rates, we've also been very focused on getting our charters to agree to more equitable contracts that either remove the termination for convenience clause completely or significantly improve the termination provisions. Whilst Tidewater is very focused on this issue as we agree to new contracts, we believe that the industry must be equally disciplined regarding termination provisions to help build a long term sustainable growth industry again.

Speaker 3

So overall, we remain very positive for the long term health of the market. And with discipline and a high quality fleet, we have, as mentioned by Quentin earlier, been able to move our fleet comps at dayrate up by over $1800 per day compared to the prior quarter and by over $7,200 per day since the recovery began at the end of 2021. Very positive momentum, we believe not just for Tidewater, but for the whole industry. Working through our various regions and starting with Europe, where we saw the biggest impact from the Solstad acquisition. We saw strong demand for PSVs in Norway, UK and the Med.

Speaker 3

However, the large AHTS market in the UK North Sea was slightly softer in Q3 than expected, with average rates for our 2 large AHTSs in the region dropping from $36,913 per day in Q2 to $31,048 in Q3. However, even with the relative sluggishness in the HTS sector, the team still improved our composite fleet rates compared to Q2 2023 from $18,990 per day to $19,105 per day across the whole region. Moving to Africa, we continue to see rising demand across the whole continent. And in Q3 2023, the composite fleet rate improved by $1303 per day from $14,469 per day in Q2 2023 up to $15,772 per day, with most of the day rate improvement in the quarter coming from our 8,000 to 16,000 BHP class AHSs and plus 900 Square Meter Class PSVs. With the 8000 to 16000 BHP Class AHSs, We had a couple of boats roll off old legacy contracts and into new contracts with leading age day rates in excess of $20,000 per day levels.

Speaker 3

In the Middle East, our most challenging region competition wise, the team managed to still push rates and increased our total composite fleet rate from $10,449 per day in Q2 2023 to $10,554 per day in Q3 2023. The Middle East traditionally has always recovered slower than other areas because of a combination of challenging competition, but also the nature of the region is to have longer term contracts. So So it takes time to roll vessels onto new mark to market day rates. However, it remains a key area of focus for the fleet due to the consistent long term utilization we can achieve in the region some of our smaller classes of vessels. In the Americas, we've seen a lot of demand in Brazil throughout the year from Petrobras, The NOC report to have come to the market again for another 20 large PSV tender to commence in 2024, which added on to the contracts already awarded in 2023, will only help to tighten the global supply for large PSVs going into 2024.

Speaker 3

In Q3 2023, our Americas fleet continued to perform strongly with our team able to push composite fleet rates by $3,226 per day from $20,269 per day in Q2 2023 up to $23,495 per day in Q3 2023. Most of the uptick in rates coming from the PSCs leading edge term day rates achieving in excess of $40,000 per day in the region during the quarter. We also signed several new contracts in the region with no termination for convenience clauses with various oil majors. Lastly, in Asia Pacific, In Q3 2023, the Asia Pacific team continued to sustain impressive rates across the region and increased the composite rates in the region by $16.17 per day from $24,250 per day in Q2 2023 up to $25,867 per day in Q3 2023. It is worth noting in this region that whilst day rate momentum has been robust over the course of the year, quarter to quarter, we do see some rate movements when we move vessels in and out of work in Australia or Taiwan, which tend to be high day rate and higher OpEx areas compared to other countries in the region.

Speaker 3

So during the quarter, we did see a day rate drop in the smaller class of PSCs as some vessels finished working in the wind farm summer season in Taiwan and moved on to contracts in other areas of Asia. However, Overall, day rates in the region were up by 6.7%. All in all, a very impressive performance from the Asia Pac team. Overall, we are very pleased with how the market has continued to improve in Q3, not just with significant day rate improvement over the quarter, but also with the success that our teams are achieving, pushing more equitable contract terms on to our customers. And with that, I'll hand it over to Sam.

Speaker 3

Thank you.

Speaker 4

Thank you, Pierce, 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 the quarter to quarter results of the Q3 of 2023 compared to the Q2 of 2023. The 3rd quarter results were impacted by 2 significant events. On July 5, we completed the acquisition of the 37 platform supply vessels from Solstad for $594,000,000 We financed the acquisition through a combination of net proceeds from a $250,000,000 5 year 10.38 fixed rate unsecured Nordic bond, a new $325,000,000 3 year SOFR linked floating rate amortizing senior secured senior bank term loan together with $18,500,000 of cash. More details of the financing are available in our recent 10 Q filed yesterday.

Speaker 4

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, Point 23. This resulted in about 1,900,000 shares of stock issued for a total of 111,500,000 As noted in our press release filed yesterday, we reported net income of $26,200,000 for the Q3 or $0.49 per share on revenue of $299,300,000 compared to $22,600,000 of net income or $0.43 per share in the Q2 on $215,000,000 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.

Speaker 4

The utilization increase was driven by higher utilization of the Solstad vessels, lower mobilization days, offset somewhat but slightly higher dry dock and down for repair days. Also contributing to the increase in revenue was an increase in average day rates, which increased by 11.4 percent from $16,042 per day in the 2nd quarter to $17,865 per day in the 3rd quarter. Vessel margin in Q3 was $132,700,000 compared to $92,100,000 in Q2, while vessel margin percentage increased to 44.7% in Q3 from 43.8% in Q2. Adjusted EBITDA was $117,200,000 in Q3 compared to $72,000,000 in Q2. Vessel operating costs for the quarter were $164,200,000 in Q3 compared to $118,300,000 in Q2.

Speaker 4

The Solstad vessels contributed $35,000,000 to the increase. In the quarter, we did see an increase in days down for repair in idle time as vessels moved to new contracts, which added approximately $6,000,000 of unplanned costs, and we also incurred an additional $4,000,000 and incremental costs associated with the Solstad integration. In the quarter, we sold 3 non core vessels, 1 from our assets held for sale, 2 from our active fleet for net proceeds of $945,000 and recorded a net gain of $863,000 on the sale of these vessels. We generated operating income of $55,700,000 for the Q3 of 'twenty three compared to $38,900,000 in Q2. The increase is due primarily to the higher revenue.

Speaker 4

As we look to Q4, we now estimate total revenues to be approximately 309,000,000 in a gross margin of 47%. For 2024, we are now projecting our revenues to be between $1,400,000,000 and $1,450,000,000 and a gross margin of 52%. G and A cost for the quarter was $21,000,000 which was lower than last quarter. Q2 included $2,400,000 in bad debt expense related to a customer's receivable balance that we determined was uncollectible. In addition, we also incurred $1,200,000 in transaction expenses related to the Solstad vessel acquisition.

Speaker 4

We expect our total G and A cost for 2023 to be approximately $95,000,000 which includes approximately 6 point dollars 2,000,000 of transaction costs related to the Solstad vessel acquisition, dollars 1,700,000 of bad debt expense and $9,600,000 of non cash Equity Compensation. Excluding the items, our overall G and A costs for 2023 will be approximately $87,100,000 and our Cash G and A cost will be approximately $85,400,000 Over the years, we've done extremely well in maintaining a very low industry leading G and A cost per market today. Our cost per day for 2023 will be about $1300 per day. We see that number marginally increasing in 2024 to about $13.55 per day as the amortization of our equity based stock compensation related to the performance of our stock will grow year over year due to the substantial increase in our stock price. For 2024, we project our noncash equity compensation to be $13,000,000 and our cash G and A costs to be about $93,000,000 which includes $3,500,000 related to the Solstad acquisition.

Speaker 4

In the quarter, we incurred $20,600,000 in deferred drydock costs compared to $21,400,000 in Q2. In the quarter, we incurred 8 80 drydock days, which affected utilization by 4 percentage points. In Q4, we will be pulling forward a couple of dry docks that were projected to be done in 2024 to take advantage of the idle time before they start the new contracts. With that change, we now estimate our drydock costs for the full year 2023 to be about $91,000,000 In Q3, we also incurred $5,700,000 in capital expenditures related to IT infrastructure upgrades and vessel modifications. For the full year 'twenty three, we expect to incur approximately $28,000,000 in capital expenditures, dollars 5,000,000 of which has been reimbursed by our customers.

Speaker 4

2024 will be another heavy drydock year as we incorporate the Solstad vessels into our system. We project our drydock expense for 2024 to be approximately $125,000,000 including carryover costs from 2023 ongoing projects. In addition, for 2024, we anticipate capital expenditures to be about $23,000,000 We generated $29,100,000 of free cash flow this quarter. We did see an increase in working capital investment, primarily because of the Solstad acquisition, which lowered our free cash flow for the quarter by about $30,000,000 Our investment in working capital may grow marginally as revenue increases, but we will continue to manage this capital investment slightly as we do our other capital expenditures. We expect the cash flow performance to improve in Q4 as the business continues to improve, and we do not Anticipate such a large increase in the conference table related to Solstad and both dry dock and capital expenditures are expected to be lower than in Q3.

Speaker 4

In Q4 of 2019, we began reclassifying vessels on our balance sheet from property equipment to assets held for sale. And at the end of Q3 'twenty three, We had 1 vessel remaining in assets held for sale at the value of $565,000 This vessel was sold in Q4 for 1,000,000 I would now like to focus on the performance of the regions. Our Americas region reported operating profit of $12,600,000 for the quarter compared to an operating profit of $6,200,000 in Q2. Vessel operating margin decreased from 41.2% in Q2 to 38 0.9% in the current quarter. The region reported revenue of $78,700,000 in Q3 compared to $50,400,000 in Q2.

Speaker 4

The region operated 37 active vessels in the quarter, an increase of 5 vessels from Q2. Vessel increase It's due to the addition of the Solstad vessels to the region. Active utilization for the quarter was 86.3% higher down to $85,400,000 in Q2. Day rates increased 15.9% to $23,495 in Q3 from $200,269 per day in Q2. The increase in operating income was due primarily to increased revenue from the vessels and lower bad debt expense.

Speaker 4

This is offset somewhat by increased operating costs also due to the addition of the Solstad vessels. For the Q3, the Asia Pacific region reported an operating profit of $14,600,000 compared to an operating profit of $7,000,000 in Q2. Vessel operating margin increased from 47% in Q2 to 51.7% in Q3. The region reported revenue of $39,000,000 in the 3rd quarter compared to $22,600,000 in the prior quarter. The region operated 18 active vessels, which is up 4 vessels on average compared to Q2.

Speaker 4

The increase in vessels was attributed to the Solstad acquisition. Active utilization increased to $91,300,000 in the quarter compared to 72.4% in Q2. Day rates also increased by 6.7 percent from $24,000 per day in Q2 compared to $25,867 per day in Q3. The higher operating income is due to the increase in revenue resulting from the higher day rates, higher utilization and the addition of the SolSat vessels. For the Q3, the Middle East region reported operating loss of $1,100,000 compared to an operating loss of $1,700,000 in Q2.

Speaker 4

Vessel operating margin decreased marginally from 22.7 percent to 22%. The region reported revenue of $34,700,000 in the 3rd quarter compared to $31,900,000 in the prior quarter. The region operated 45 vessels, an increase of 1 vessel from Q2. Active utilization increased from 76% in the 2nd quarter to 79.8% in Q3. Day rates increased from $10,449 per day in Q2 to $10,544 per day in Q3.

Speaker 4

The improvement in operating results was due primarily to the increase in revenue coupled with slightly lower G and A expense. Our Europe and Mediterranean region reported operating profit of $9,600,000 in Q3, an increase from Q2 where the region reported operating profit of $8,300,000 Vessel operating margin increased from 45.8% to 46.7%. Revenue doubled to $78,900,000 in Q3 compared to $39,300,000 in Q2. The region operated 50 vessels in the quarter, 24 more than Q2, which was attributed to the Solstad acquisition. Active utilization increased to 88.8% compared to 85.7% in Q2.

Speaker 4

The increase in utilization was primarily due to Solstad vessels operating at higher utilization rate. In addition, day rates increased to $19,105 per day compared to $18,990 per day in Q2. The increase in operating income for the quarter was mainly driven by the increase in revenue from the Solstad vessels, offset by higher operating costs encountered as part of the Solstad vessel integration. Our West The region reported operating profit of $28,400,000 in Q3 compared to operating profit of $25,500,000 in Q2. Vessel operating margin increased from 53.6 percent to 55.1%.

Speaker 4

The results in this region continue to improve as the demand in the market remains very strong. Revenue for Q3 was $73,700,000 compared to $66,200,000 in Q2. The region operated 69 vessels on average in Q3, 4 more than in Q2, 3 of which were Solstad vessels added to the area. Active utilization decreased to 73.9% in Q3 from 77.8% in Q2 as several vessels incurred some frictional unemployment as they came off whole contracts and began new contracts. Day rates continue to increase as we saw a 9% increase to $15.72 per day in Q3.

Speaker 4

The increase in operating income from Q2 was mainly from the higher revenue. In summary, we are pleased with our Q3 results. The quarter was impacted by numerous items. We repositioned 4 vessels to different regions and higher than anticipated idle time due to higher dry docks and higher repair days, and we integrated a large percentage of the 37 vessels we purchased from Tolsted and plan to have all the vessels integrated by the end of this month. We're now in a stronger position to accelerate the growth of the company.

Speaker 4

We are adjusting some of our expectations, but overall expect the fleet will continue to excel and the challenging ramp up in activity that we expect over the next few years. We remain very encouraged by the leading indicators we continue to see. We are pleased to continue to continue increases in revenue throughout the year, driven by our acquisitions and the higher day rates, And we're very excited to see how 2024 is developing. With that, I'll turn it back over to Quentin.

Speaker 2

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

Operator

Okay, great. Thank you. Your first question comes from the line of Jim Rolleeson with Raymond James. Please go ahead.

Speaker 4

Good morning, gentlemen. Good morning. Good morning.

Speaker 5

Quentin, 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 to a 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.

Speaker 2

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.

Speaker 2

Then we had some one time costs associated with just going through the process of the integration that I was I think that was about $4,000,000 in total. And then the unknown was we had about 6 $1,000,000 of costs related to vessels that went down for repair that we weren't anticipating. And I attribute that to just teething issues related Reactivating the entire fleet back in 2022. So right now, we're in a great position where we can push costs through core customers. And so that's the upside here is as the cost base changes.

Speaker 2

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 you're not going to see the economies of scale on the per boat basis that we see on the G and A basis naturally. So I think that Embedded in the 'twenty four 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.

Speaker 2

But my hope is that at the end of the day, this is all about improving margins and that we can push all of that through to our customers as we go through 2024.

Speaker 5

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.

Speaker 2

Does that generally No, no, absolutely. Yes, yes, absolutely. And I think my hope is that there's also a disproportionate push up in day rates because quite frankly, we're still not earning our cost of capital. So I mean I'm pushing up day rates just to get my cost of capital and I'm layering on top of that any cost basis changes as a result of the cost structure.

Speaker 5

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.

Speaker 5

I think you mentioned 10 months this quarter was 6.5%, I think it was 7 or 8 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?

Speaker 2

Well, I'm I'm so 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 just can't see the supply and demand factors so strongly in the vessel owners' favors that I don't want to And but on the lower end tonnage, so like these longer term contracts that we locked up in Q3, They were like lower specification tonnage. I mean, 2 20 vessels, not every vessel is the greatest vessel ever built.

Speaker 2

And so on the lower side of the specification spectrum, I don't mind locking those up a little bit longer 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. And so like that's going to be

Speaker 5

next year for sure. Appreciate it.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from the line of Greg Luis with BTIG. Please go ahead.

Speaker 6

Hey, guys. Good morning. Thank you. Hey, guys. A question for you.

Speaker 6

Realizing this was a quarter of integration. Quinn, any kind of rough guidance you can give us around As we're looking at the larger PSV segments as you know maybe where the Solstad fleet maybe Kept the lid on pricing in terms of reported day rates versus maybe where it was additive, if at all.

Speaker 2

Yes, no, there's definitely a mix. So 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, 1.5 years, that should reprice quite nicely. And then generally in the North Sea market, it's been Fairly fixed, half of it is going to roll over by the end of 'twenty four.

Speaker 6

Okay. And then, I did have a question around that. You called out that the $6,000,000 of kind of unplanned cost during the quarter. Was that related to a few vessels or a few handful of vessels where as you were reactivating them previously, they had to come back. Any kind of color around that and how we

Speaker 2

It was about 7 in total, and I think most of them were in the Middle East this quarter, although they're somewhat spread out. I think we had 1 in Brazil as well. Yes. Unfortunately, when you put a boat to work, you do everything you think you need to do to make sure that the boat It's sound, but when the equipment hasn't worked in a while, you just never know what valve is going to break or what the piece of moving Equipment no longer moves when it should. So we have some teething issues that we're working through.

Speaker 2

It is temporary. You go through this and I think we We have another 3 or 4 months of it. I budgeted into the guidance that we put into the Q4 and into 'twenty four, But my hope is that we'll be able to improve upon that even sooner than that.

Speaker 6

Okay, great. And then just one final one for me. As we think about 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.

Speaker 2

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 Pierce. Pierce, have you seen any changes in the seasonality patterns over time?

Speaker 3

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, we have a seat in the Asia Pacific where we pick up quite a lot of work in Taiwan that's similarly as a So Q2, Q1, Q2 start the story as well, but no, there's not a particularly seasonality. It's more of a Q1 This is where we'll see a lot of the contracts coming through for next year.

Speaker 6

Perfect. Thank you very much.

Speaker 2

Thanks, Greg.

Operator

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

Speaker 2

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

Operator

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

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Earnings Conference Call
Tidewater Q3 2023
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