GulfMark Offshore, Inc. (NYSE:GLF)
Q1 2016 Results Earnings Conference Call
April 26, 2016, 09:00 AM ET
Michael Newman - Director of Investor Relations
Quintin Kneen - President and Chief Executive Officer
Jay Mitchell - Executive Vice President and Chief Financial Officer
Joe Gibney - Capital One
Turner Holm - Clarksons Platou
Cole Sullivan - Wells Fargo
Mark Brown - Seaport Global Securities
Welcome everyone to the GulfMark Offshore First Quarter 2016 Earnings Conference Call. My name is Allison, and I will be your conference specialist for the presentation. On the call today are Quintin Kneen, President and Chief Executive Officer; Jay Mitchell, Chief Financial Officer, and Michael Newman, Director of Investor Relations. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the call over to Mr. Michael Newman. Please go ahead.
Thank you, Allison. Before we hear from Quintin and Jay, I'd like to remind everyone that this conference call will include comments that are forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements reflecting GulfMark’s expectations, intentions, assumptions, or beliefs about future events or performance, that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or are beyond GulfMark’s control. Actual results may differ materially from those expressed or implied in any forward-looking statements.
Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, the price of oil and gas and its effect on offshore drilling, vessel utilization and day rates, industry volatility, fluctuations in the size of the offshore marine vessel fleet in areas where GulfMark operates, changes in competitive factors, and other factors described in GulfMark’s filings with the SEC.
For additional information concerning some of the risks, uncertainties and assumptions that could affect GulfMark’s forward-looking statements, please refer to our annual report on Form 10-K for the year ended December 31, 2015 and GulfMark’s other documents filed with the SEC which may be obtained on our website or through the SEC’s website at SEC.gov.
The forward-looking comments on this conference call should not be regarded as representations that the expected outcomes can or will be achieved. Management cautions that you should not place undue reliance on GulfMark’s forward-looking statements, and GulfMark does not undertake and disclaims any obligation to update or revise any forward-looking statement based on new information, future events or otherwise, and disclaims any written or oral statements made by any third party regarding the subject matter of this call.
Please also remember that the information reported on this call speaks only as of today, April 26, 2016 and therefore you are advised that any time-sensitive information may no longer be accurate at the time of any replay of this call.
During our call today, we might also discuss non-GAAP financial measures. Please reference or refer to our filings with the SEC for a reconciliation to the most comparable GAAP measures.
With that said, I’ll turn the call over to Quintin.
Thank you, Michael. Hello again everyone and welcome to the first quarter 2016 GulfMark earnings conference call. The format for today's call will follow our customary format. I have some prepared remarks on the first quarter and on current market conditions, then I will hand it over to Jay to go over the quarterly numbers in more detail and then we will open it up for questions.
We remain focused on generating positive cash flows from operations each quarter of the downturn. The first calendar quarter is often the toughest quarter of any given year for us because it combines a seasonally low point in operations with typically large working capital outflows from items such as the semiannual interest payment on our senior notes. The first quarter of this year was difficult, but I am pleased to report that we remain cash flow positive from operations.
After cash flows from operations we spent $7.2 million on vessels under construction and we opportunistically spent $10 million repurchasing our senior notes on the open market. The first quarter is typically our weakest quarter of the year and for the many of you who have followed us for years, you will recall that it is normally the weather in the North Sea that drives that calendar year seasonality.
Our first quarter of 2016 was no different. We saw the North Sea drop off was about as usual, but we also saw sequential declines in the other two regions as well, when typically these are the regions will lift our first quarter results. Our marketed utilization for the first quarter was 81% consistent with our full-year 2015 average, but down approximately 3 percentage points from the fourth quarter of 2015. Our objective is to push marketed utilization up on to the high 80s by the end of 2016.
We anticipate that the business will remain challenging for some time. We remain focused on maintaining collaborative and positive relationships with our employees and our lenders, the two groups along with our stockholders that are feeling the brunt of this downturn and whose cooperation is essential as we manage the business through to the recovery.
We will continue to resize with business as quickly as possible as industry conditions change in each of our primary operating areas. We continue to look for ways to liquidate older and underutilized vessels, reduce labor cost, manage our capital expenditure commitments, and to achieve greater economies of scale from our general and administration spending.
As we have done each quarter of the downturn, I am confident our continued ability to respond quickly to changing market conditions and to maintain adequate liquidity. Around the world absolute vessel demand continues to decrease as drilling activity declines and as E&P companies look to decrease their cash spend by achieving efficiencies and offshore production.
Vessel owners throughout the world continue to put vessels into lay-up and in areas of the world where the visibility of vessel supply and demand is very good such as the North Sea the market of supplier vessels is decreasing to the point where we are seeing increasing episodes of market tightness.
Last week in the North Sea we saw PSV spot rates double within 36 hours, a good sign that owners are willing to quickly push spot rates above cash flow breakeven when they have the opportunity and ability to do so. I suspect that we will see demand declines level off and the vessel lay-ups will once we catch up through this fulfilled level demand in each region and at that time spot prices will hover just over all in cash cost.
Demand is fragile enough that I don’t expect any owners to aggressively push up prices for fear of being penalized by operators in the future and thereby driving future work to other owners. Around the world owners are doing a remarkable job of quickly putting boats into lay-up.
Everyone is looking to de-crew as fast as possible. So the rate at which owners will put vessels into lay-up was always slower than the decline in demand and that is somewhat expected, but owners are pushing idle boats into lay-up even if they are new and large, de-crewing newer tonnage and then reactivating that newer tonnage when an older boat rolls off charter and then when possible moving the crew on to that newer vessel.
In Southeast Asia the market is more difficult to assess from a supply and demand perspective as the market in that area of the world is like other areas of the world in a state of oversupply. It has historically operated predominately on annual calendar year charters. With the decrease in activity during 2015 the renewal rate of existing annual charters has decreased and this has resulted in increased price based competition in the beginning of the year as owners less certain about the supply and demand outlooks strive to keep up utilization.
Southeast Asia is the last of our regions that feel the full effect of the downturn. Utilization was low in Southeast Asia for the reasons I previously mentioned, but similar to what we saw in Southeast Asia in 2013 I anticipate utilization in this region to pick up and to be between 45% and 50% during the second quarter.
The Americas region is having a more challenging time at this point of the downturn. Boats we have working in the Americas region today are all in the U.S. Gulf of Mexico. The overall markets in Brazil and Mexico continue to be in a relative state of disorder. We have reduced our presence in Brazil to an essential staff level as we evaluate the best options for maximizing value on the remaining vessels we have in the region. Petrobras has decreased its activity levels significantly and the statutory preference for Brazilian tonnage continues to absorb any incremental demand.
Likewise PEMEX is struggling with budgetary issues and vessel activity over the past year has been meaningfully reduced. Throughout the world we are reducing daily operating costs. As many of you know, our two largest cost categories are both labor. Offshore labor is our largest expense followed by onshore labor. After those labor cost categories, our next biggest costs are vessel repairs and maintenance and vessel supplies.
Offshore labor costs are impacted by the reduction in the number of offshore mariners as we lay-up vessels as well as reductions in the base salary we pay our offshore mariners and then lastly reductions in fringe benefits. The same goes for onshore labor.
Our quarterly labor costs are down 62% since the fourth of 2014. At the end of 2014 we had approximately 1800 offshore staff and 180 onshore staff. We are now down to approximately 900 offshore staff and 130 onshore staff. As is typical throughout the offshore supply chains we are pushing our suppliers to reduce costs and to achieve operational efficiencies.
Our quarterly run rate for repairs and maintenance expense is down 68% from its level in the fourth quarter of 2014 and our quarterly run rate for vessel supplies is down 57% over the same period.
We have made substantial reductions in costs since the fourth quarter of 2014. The reduction in cost is principally labor related and principally the result of reducing headcount, but there have also been meaningful reductions in base salary levels, fringe benefits and associated expenses such as travel. These labor saving initiatives force us to become more efficient early and these efficiency savings are those savings that we anticipate will carry through to the recovery.
Headcount base salary rates and fringe benefits will be monitored closely, but it is likely that these costs will be the first to experience upward pressure as the recovery unfolds. It is not our belief that these costs will revert to their 2014 levels immediately upon recovery, but it is our belief that the industry will experience difficulty attracting mariners back into the offshore industry given the employment volatility and many of them have recently experienced without increasing wage rates.
Consequently, the permanent through the cycle efficiencies we expect will come as a result of this downturn will be from the shore based operations. How efficient we become at administrating our global footprint is key to gaining those long-term benefits.
The reduction in spending outside of labor relates to supplying the vessels and to vessel maintenance and repair. We are not deferring any required maintenance on vessels that are operating and we will not do anything to put at risk our reputation for safe and reliable operations. But as you would expect, we are judiciously deferring required maintenance on vessels that are in lay-up.
Our core competencies during this downturn is the development of sufficient procedures for managing an idle fleet, preserving asset value, understanding reactivation requirements, strategically repositioning and locating assets, all factor into managing our fleet in lay-up. The median cost per day per vessel of the vessel in lay-up is just under $700.
We are currently working with two shipyards in building the final three vessels in our New Build construction program. We have approximately $4 million of capital expenditures in the second quarter and no capital expenditures in the second half of 2016. We anticipate that we will deliver the first Jones Act 300 Class PSV before the end of the second quarter and we have the Norwegian PSV scheduled to be delivered in early 2017.
The Norwegian delivery will result in a payment of $23 million. The final vessel, the second 300 Class Jones Act PSV should be ready for delivery in July 2017. If we elect to take delivery of that vessel, we will have a payment due of $26 million.
And with that, I will turn the call over to Jay, to go over the quarterly numbers in more detail.
Thank you, Quintin. Quintin highlighted us being positive cash flow from operations and I want to specifically highlight that we generated positive cash flow from working capital during the quarter despite paying over $8 million more in cash interest than we expensed in the quarter due to the timing of the interest payments in our bonds that Quintin specifically mentioned earlier.
I want to speak briefly about the numbers and liquidity before handing it back to Quintin to open the call up for questions. During Q1 we recorded four special items outside the normal fundamentals of our business.
First, we recognized an impairment of assets in the amount of $116.7 million before tax or $83.5 after-tax or $3.36 per diluted share. This resulted from the normal U.S. GAAP impairment analysis for long-lived assets and we impaired our Americas fleet by $94.5 million before tax or $61.3 million after tax. We impaired assets in Southeast Asia by $20.2 million with no tax effect and we impaired assets in the North Sea by $2 million with no tax effect.
Second, we recorded a gain of $10.1 million before tax. The tax was $3.5 million so it was $6.6 million after-tax on the extinguishment of debt as a result of repurchasing a portion of the company bonds at a discount in the open market.
Third, wrote down debt issue costs of about 200,000 or a penny per share with tax associated with the repurchase of company bonds. Before tax this was recorded as $300,000 of interest expense.
And finally, we recorded workforce redundancy and exit charges of about $1.5 million or $0.06 per diluted share net of tax. Similar to the previous quarter, we continue to incur these costs as we lay-up vessels and reduce headcount. That's it for the special items. We will exclude the effects of these items from the ongoing results as we discuss operations.
Regarding operations, we were able to reduce our direct operating expenses as expected. We laid up additional vessels and experienced the impact of wage reductions that took effect during Q1 in some areas. Overall direct operating expenses were down 22% compared with Q4 which was primarily driven by vessel lay-ups.
During the quarter we reduced wages paid to mariners in the U.S. by an average of 10% effective in February. Direct OpEx exclusive of special items was $22.5 million in line with our guided range of $21 million to $24 million and G&A inclusive of special items came in within our guided range of $9 million to $10 million.
In the first quarter we had an average vessel count of 70 vessels. Our marketed vessel utilization was relatively strong at 81%. Unfortunately the overall vessel utilization dropped to 38.4% that is down 14 percentage points sequentially and represents a drop of about 10 working boats on average. Average day rates of 13,000 were down about 9% sequentially and this gave us revenue of $38.8 million and about 80% of the revenue decline was due to the fall in utilization 20% was due to a drop in average day.
Since our last earnings call, we have increased the number of stacked vessels to 38 from 37 and we forecast the direct operating expenses will be in the range of $19 million to $21 million in the second quarter of 2016.
Consolidated drydock expense was about $800,000 during Q1 and which we anticipate incurring about $100,000 of drydock expense during Q2. That should be about $4 million for the full year for drydock expense now.
General and administrative expenses were $9.8 million in Q1. Excluding severance and exit cost, G&A was about $9.5 million within our $9 million to $10 million guidance range. We expect Q2 2016 general and administrative expense to be between $8 million and $9 million exclude special items.
Depreciation expense was $16 million and we anticipate it will be down a bit in Q2 due to the vessel impairments recorded during the quarter. Interest expense for the first quarter was $8.4 million, net of the impact of debt issue cost write-off related to the bond repurchases interest expense was $8.1 million. Interest expense should fall slightly in Q2 to about $7.9 million. The tax benefit for Q4 was $35.4 million. Exclusive of special items the tax benefit would have been $5.7 million. Going forward we anticipate the income tax rate will be 25% to 30%. As I stated earlier, we anticipate the cash taxes will remain near zero for the next several years.
During the last call, we discussed that our credit facility covenants replace the interest coverage covenant and introduce the minimum adjusted EBITDA covenant after the period. Again, under that covenant we are able to add back non-cash compensation which was $1.5 million for the first quarter and severance and other exit costs which were also $1.5 million in the quarter.
For the first quarter, this covenant requires us to have $10 million of adjusted EBITDA for the combined quarters of Q4 2015 and Q1 2016. We generated $30.7 million for that period according to this calculation. That is $13.3 million in Q4 2015 and $17.4 million during Q1 of 2016.
The adjusted EBITDA requirement increases to $15 million for the prior three quarters in Q2 of 2016 and $20 million for the prior four quarters by Q3 of 2016. The requirement then stays at that level through Q2 of 2017. Importantly, we've already generated $30.7 million of the $15 million required for us to make this covenant next quarter. According to our forecast, we anticipate being able to meet covenants through 2017.
During the quarter we reduce debt by repurchasing a portion of our senior unsecured notes. We purchase 20 million face value of our bonds back for about $9.9 million which created a gain of $6.6 million after-tax. Those gains are included in the covenant calculations we just discussed.
After the repayments and purchases we had a total of $486 million of long-term debt outstanding. Net debt was $466.4 million at the end of the quarter which is a decrease of approximately $2.2 million since the fourth quarter now. The total liquidity of the company today is healthy at approximately $175 million.
So to summarize the first quarter, recorded loss of $3.66 per diluted share and excluding special items the adjusted loss was $0.50 per diluted share. Despite this loss we generated positive cash flow from operations during the quarter. CapEx net of dispositions during the quarter resulted in net cash outflow of $7.2 million.
We have approximately $27 million of committed CapEx related to our remaining New Build vessel in Norway and we have no remaining CapEx related to the New Build vessel in the U.S. that we're unable to forgo with the proper option. We expect to incur about $4 million of CapEx during 2016 and $23 million during Q1 of 2017 with no committed CapEx beyond 2017.
Cash on hand at the end of the quarter was $19.7 million and we have $15 million outstanding on our revolving credit facility. Since the end of the quarter we've continued to increase our cash a bit and our current cash balance is approximately $20.3 million. So liquidity is still healthy to approximately $175 million and our net debt to total cap is about 42%.
With that, I am going to turn the call back to Quintin who will summarize and open the call for questions.
Thank you, Jay. Allison, would you please open the call up for question?
Certainly. [Operator Instructions] And our first question will come from Joe Gibney of Capital One. Please go ahead.
Just a quick question on OpEx, specifically sort of cash costs on a regional basis, I know you've referenced Southeast Asia and that $4000 a day OpEx, I was wondering if you could remind us on a regional basis how we think about North Sea and Gulf of Mexico where those cash costs are as well?
Bear with me for just a second. North Sea is running somewhere in that $8000 a day range. It jumps around boat to boat. It can be down in the $7000 and over $9000, but it is in that range.
I think you are asking about the Gulf of Mexico as well Joe, is that right?
U.S. Gulf of Mexico is not too far off that either.
Around 8K okay that's helpful. And Quintin, just some perspective I guess on the sales market, I know you have referenced Middle East in your last call talking about potentially selling three or four additional boats in 2016, is that still sort of an accurate figures as you look through your portfolio of vessels and then may be where the market price is now as we consider that versus book for older tonnage versus newer tonnage will be helpful?
Okay, well certainly it still is our objective to sell at least that many vessels in 2016. The interest that we're seeing is still on the smaller older tonnage. So we originally have people on boats doing inspections and doing surveys. And I would say that when I look at the boats that now are getting the attention which is boats that we have that are 15 to 20 years old.
The indications that we're getting are in that 25% to 40% of book value range, so yes, relatively low in the grand scheme of things. Normally we would sell those at least 100% of construction cost and that would have been in the $10 million to $12 million range. So the offers that we're getting on these boats are in the $2 million to $3 million range.
The activity level on larger assets is just isn’t there. There is just no real market for the newer tonnage or the more modern tonnage. I think as the recovery – as the outlook brightens and then recovery becomes closer at hand we are going to see more attention given to that newer tonnage. But right now we see older smaller tonnage being looked at primarily for use in areas like offshore India and offshore Middle East.
Okay, helpful. And last one from me is just on your fleet, I'll turn it back. Just to confirm, so all of your Americas fleet is now Gulf of Mexico is the one that's all that was in Mexico now back in the [indiscernible] and stacked or is it stacked in-country in Mexico, I was just curious there?
It is idle in-country in Mexico and my anticipation is that we will keep a presence in Mexico too.
Okay, thank you guys, I'll turn it back.
Our next question will come from Turner Holm of Clarksons Platou. Please go ahead.
Hey good morning guys, thanks for taking my call.
Hey, good morning, Turner.
Hey, Jay so I have a question for you, it is the question about the revenue in the Americas. I was just looking at the numbers in your reported revenue in the second half was I believe 10% lower than it was in the fourth quarter. So I noticed that the change in day rates quarter-over-quarter I think was 17% and then utilization I guess absent that full count would have been lower. Was there some sort of special revenue item in the Americas like a – came from contract, just wanted to make sure I am not missing anything?
You know, Turner, we actually have special items that do occur almost every quarter. In the fourth quarter we had some special items that occurred in the first quarter we had some special items that occur. We get payments for boats that can be moving from one place to another we get them for contract cancellations and the like and there were some items in both the quarters, the fourth and first quarter that you are looking at.
So I guess, yes.
Yes, the short answer is yes, sorry.
All right, yes, okay great. And now I guess on the accounting for the revenue without associated costs or is there cost that's reflected in the reported numbers those types of special items?
There are also costs that get associated with that, but that's just with the vessel taken care of the mariners to the extent that you are moving the vessel from one place to another, you'd have some other costs that flow through to the extent that you're laying up a vessel you may have severance and exit cost for the vessel itself and the lay-up cost itself.
Okay, all right, yes I understand. All right, thanks for that. And then just one more from me, I guess Quintin, it seems like there the number of stacked vessels that you guys have seems to be kind of leveling loss and the half of these owned do you guys see it kind of maintaining that level going forward, is that the expectations you seeing or the [indiscernible], just curious what your thoughts are on that?
You know, what I actually expect to happen is that it will impact both out of stack around 2016 but day rates are going to continue to give a little bit. So what I expect to see is that some of the newer more modern tonnage that we have put into lay-up and some of the boats in Southeast Asia is that we have potentially stacked will pull out, but it will go back toward a little bit lower day rates and so utilization I actually expect to see go up, but day rate to come down throughout 2016.
Okay, all right that's helpful, thanks guys.
Our next question will come from Cole Sullivan of Wells Fargo. Please go ahead.
Hi thanks. I had a question on the impairments you guys took in the Americas, but if you could go into a little bit more detail on actually there was restructuring in progress, I think that was mentioned in your press release as well as the kind of triggering [indiscernible] is it still related to a vessel goes into hold stack mode that your downside appraisals is that still the case?
We actually do a test on a quarterly basis and our test is a bit more broad than just a vessel going into lay-up. We look at the commodity price. We look at the rates we're actually at – the rates we actually have. We look at utilization of the vessels, that we believe is the GAAP standard that that you need to do as opposed to looking at it on an individual vessel by vessel basis.
And during the quarter we absolutely had triggering events. We actually do get quarterly appraisals from third parties that we use to go back and then mark those items. At the beginning of the quarter there was not a lot of CIP [ph] but that is thrown into the overall asset group when we do the impairment.
Okay, I appreciate it, I'll turn it back.
[Operator Instructions] Our next question will come from Mark Brown of Seaport Global Securities. Please go ahead.
Hi, thank you. I wanted to ask about repurchasing debt. It looks like you got a pretty good discount on about $20 million of face value and I was wondering if that's a philosophy you have now with any additional cash flow, free cash flow that you'll be using that to buy back more debt?
I think we have the opportunity to get a fairly good deal on some debt during the quarter, this was the same quarter we were able to forgo some of the CapEx commitments that we had out there and we felt that was a good trait to be able to get – repurchase our debt it was yielding we felt to be a very attractive return. We do continue to watch our liquidity carefully, so I don't know that I would forecast that we will or will not be making substantial debt repurchases in the future, but it certainly is a possibility.
And certainly will create changes from owned significant vessel sale or something like that we would consider this as well.
Good, and I was just wondering on your North Sea it looked like you have about 45% contract coverage for 2016 and I was just curious sort of firm on the – your term structure on your contract in 2016 and 2017 are some of those North Sea vessels working over a period of a few years or what is the profile?
Well, the profile is changing all over the world. The contracts are not – the newer contracts are not as long as the older contracts. But we still have two contracts that are multiyear contracts in the North Sea. But I will say that the majority of the contract cover rolls off in the next nine months.
Okay, good, thank you very much.
I have no other questions in queue. So that will conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Kneen for any closing remarks.
Thank you, Allison. And thank you everyone for your interest in GulfMark. We look forward to updating you again in July. Good bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!