Oceaneering International, Inc.

My name is Marcella and I will be your conference operator today. I would like to welcome everyone to the Oceaneering's first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. With that, I will turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations.

Thank you, Marcella. Good morning, everyone, and welcome to Ocean Airing's first quarter 2020 results conference call. Today's call is being webcast, and a replay will be available on Ocean Airing's website. Joining us on the call are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments, Alan Curtis, Chief Financial Officer, and Marvin Magura, Senior Vice President. Before we begin, I would just like to remind participants that statements we make during the course of this call regarding our future financial performance, business strategy, plans for future operations, and industry conditions are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our first quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rob.

Good morning, and thanks for joining the call today. What a difference a quarter makes. We began 2020 with the expectation of marginal growth and improving business fundamentals across all of our segments. and then the COVID-19 pandemic erupted and fueled the further deterioration of the crude oil market fundamentals as well as the theme park business. This deterioration has brought about swift changes to our customer spending plans that will negatively affect our businesses as long as these conditions persist. As a result, we're taking decisive action to reduce costs in order to drive financial performance in this environment. With the continuing threat and uncertainty around COVID-19, Oceaneering is actively taking steps to support the safety and well-being of our employees and their families, our customers, and the communities where we live and work. We've implemented preventative measures and developed corporate and regional response plans based on guidance received from the World Health Organization, Centers for Disease Control and Prevention, International SOS, and our corporate medical advisors. Our goal is to minimize exposure and prevent infection while ensuring the continued support of our customers' operations. Now for our results. For the first quarter, we reported a net loss of $368 million, or negative $3.71 per share, on revenue of $537 million. These results included the impact of $393 million of pretax adjustments. including $303 million associated with goodwill impairments, $76.1 million of asset impairments and write-offs, and $13.7 million in restructuring costs and foreign exchange losses recognized during the quarter. Adjusted net income was $3.5 million or 4 cents per share. Despite significant global challenges, we are pleased that our first quarter adjusted results exceeded expectations. The key factor in achieving these results was better-than-anticipated performance within our energy-focused businesses, which included the benefit from cost-reduction measures implemented during the fourth quarter of 2019 and the first quarter of 2020. Each of our operating segments generated positive adjusted operating results and positive adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA. and our consolidated adjusted EBITDA of $51.6 million surpassed both our forecast and published consensus estimates. Now let's look at our business operations by segment for the first quarter of 2020. Compared to the fourth quarter of 2019, ROV average revenue per day on hire decreased 4% on flat days on hire. As expected, ongoing cost control measures and efficiencies, along with fewer installations and mobilizations, resulted in improved adjusted operating performance and adjusted EBITDA. Adjusted EBITDA margin increased to 32%, and ROV utilization improved slightly to 65%. Keep in mind that although reported fourth quarter 2019 utilization was 58%, it did not include the impact of the 30 ROVs that were retired at the end of the fourth quarter. For comparison, pro forma fourth quarter utilization, reflecting these vehicles as if they had been retired at the beginning of the quarter, with 64%. During the first quarter, our fleet size remained at 250 vehicles, the same as year-end 2019. Our fleet use during the first quarter was 68% in drill support and 32% in vessel-based activity, compared to 64% and 36%, respectively, for the fourth quarter of 2019. At the end of March, we had ROV contracts on 95 of the 153 floating rigs under contract resulting in a drill support market share of 62%. Turning to subsea products, first quarter 2020 adjusted operating results exceeded expectations and were comparable to the results of the fourth quarter of 2019. Manufactured products revenue and operating results met expectations. Service and rental results outperformed largely due to higher activity in Norway and West Africa. Our subsea products revenue mix for the quarter was 74% in manufactured products and 26% in service and rental, compared to a 72-28 split, respectively, in the fourth quarter. Our subsea products backlog at March 31, 2020 was $528 million, compared to $630 million at December 31, 2019. Reflecting the higher level of throughput and lower level of market activity, our book-to-bill ratio for the first quarter was 0.5. Subsea Project sequential adjusted operating results declined on lower revenue as a result of seasonally lower vessel and survey activity. Asset integrity adjusted operating results improved, benefiting from cost reduction activities undertaken in the fourth quarter of 2019 and the first quarter of 2020. For our non-energy segment, Advanced Technologies, our first quarter 2020 adjusted operating result was sequentially flat. Adverse impacts of COVID-19 to our entertainment theme park business results offset gains from our government service businesses. As compared to the fourth quarter of 2019, unallocated expenses declined during the first quarter of 2020 as a result of lower accruals for incentive-based compensation. During the first quarter, we used $32.2 million of net cash in our operating activities and $27.2 million of cash for maintenance and growth capital expenditures. These two items represented the largest contributors to a $66.2 million cash decrease during the quarter. As anticipated, our cash balance decreased during the quarter, primarily as a result of a difference in timing associated with customer progress, milestone cash collections, and payments to vendors on several large contracts. Additionally, during the quarter, we dispersed accrued employee incentive payments related to attainment of specific performance goals in prior periods. At the end of the quarter, we have $307 million in cash and cash equivalents, no borrowings under our $500 million revolving credit facility, and no loan maturities until November 2024. As a clarification, our revolver debt-to-cap covenant is based on adjusted cap, not equity on the balance sheet. To determine adjusted cap, we get to add back all previously recognized impairments. Based on our determination, as of March 31st, We could draw down the entire $500 million and still be in compliance. Moving on to our second quarter and full year outlook. We are not providing operating or EBITDA guidance for the second quarter and full year of 2020 due to the lack of visibility in the majority of our businesses. Many of the markets we serve are being profoundly affected by the effects of and the associated responses to COVID-19 as well as the significant reductions in our oil and gas customer spending as a result of the lower crude oil price environment. We maintain our guidance that unallocated expenses are forecasted to be in the mid, excuse me, in the high $20 million range per quarter. We are further revising our capital expenditure guidance by lowering the 45 to $65 million and 2020 cash tax payments guidance by lowering range to 30 to $35 million. Directionally, we expect decreased demand for our services and products within our energy businesses. We anticipate further COVID-19-related impacts to our entertainment business. Theme park operators are dealing with significant challenges, including the reduction in revenue as a result of closed facilities and the uncertain timing of their reopenings. Our government-supported businesses, which represented approximately 16% of our consolidated 2019 revenue, are not closely tied to the crude oil or public entertainment markets, So contracting activities should be relatively unaffected, absent any COVID-19-related delays. Now turning to our liquidity and balance sheet. In any environment, and especially during this complex time, a top priority is to preserve our liquidity and balance sheet. We are taking decisive action to reduce costs by resizing and restructuring our businesses and leaning our operations in this evolving energy environment. We are currently targeting a reduction of analyzed expenses in the range of $125 to $160 million by the end of 2020, inclusive of $35 to $40 million of reduced depreciation expense. Cost reduction actions being taken include efficiency-enabling projects or, for some, process improvements and rationalizing facilities, which include increasing focus on remote operations to reduce the number of people working offshore, The consolidation, reduction, or elimination of facilities to reduce lease and operating expenses and driving our quality tenants throughout the organization to eliminate non-value-added cost. Simplification of our operating structure. We've recently and will continue to take actions to simplify the way in which Oceaneering does business by better aligning like-for-like activities to leverage people, assets, and facilities to perform services and provide products in a more efficient way. Actions taken to date include permanent headcount reductions and elimination of management layers. Compensation reductions. The base salaries for our senior leadership have been reduced by 15% for myself, 10% for all of our senior vice president positions, and 7.5% for our vice president positions. In addition, we have reduced the company match on our 401k plan by 50% and reduced the expected payouts under our short-term and long-term incentive plans. Other cost reduction activities being undertaken include implementing supply chain savings, where we can bundle purchases across business lines to achieve lower pricing and renegotiate contracts with vendors in light of current market conditions. We're also taking steps to eliminate non-productive assets, which will benefit us with lower inventories and lower carrying costs. In addition to these categories, we also expect to see a benefit from an estimated 35 to $40 million reduction in depreciation costs as compared to 2019. Although this is a non-cash expense, it is worthy of highlighting because it will benefit our operating performance and position us to return to profitability sooner. Since launching this effort, approximately $70 million of annualized cost reductions have been initiated, and that's net of depreciation expense. Additional savings are expected to be achieved throughout the remainder of the year, with the majority occurring in the second and third quarters. We expect the cash costs associated with these actions to be around $15 million. Now, before I wrap up the call, Marvin Magura, who is well known to many of you, will be retiring promotioneering at the end of May, and I wanted to offer a special thank you to him before he starts his next chapter. Over the past 25 years, Marvin has served as our chief financial officer, executive vice president overseeing all of Oceaneering's support functions, and over the past several years as a strategic advisor to me and our executive management team. Did you know that Marvin has not missed one quarterly earnings call during his 25 years? Marvin's extensive knowledge of the company, his ability to focus on the critical issues at hand, Common sense business guidance and sense of humor have made him an invaluable asset to Oceaneering. Best wishes for your retirement, Marvin. You'll be missed. So in summary, I'm pleased with our first quarter results. I believe these results show that Oceaneering had successfully adapted to the market realities in place at the beginning of the quarter. Clearly, significant changes have occurred since then that have drastically changed the anticipated activity and pricing for our services and products moving forward. While there will undoubtedly be many challenges presented as a result of these new realities, I'm confident that with the actions already underway, the quality of our services and products, and the health of our balance sheet, we will be successful in adapting and succeeding in this changing market environment. We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you may have. Marcella, will you open this up for questions?

Your first question comes from the line of Shawn Mikan. Your line is open.

Morning, Shawn.

Thanks, Tay. Good morning. Morning. So understood on the difficulty of giving formal guidance at this point, but could we just maybe go through some more granularity around how you're seeing some of these different issues impact the businesses? I mean, I think probably I want to focus mostly on ROVs, but obviously there's impact across each of the businesses. So in terms of expectations around customer decision making in the near term, folks are trying to shed costs, anything that's not nailed down they're trying to take out. And then on the second side, I would also say COVID-19 related issues, how you're managing through those both on supply chain as well as in the field from an activity perspective. There's some critical pieces there. I would love to hear Some more granularity around those issues, how you see them, to provide some context for us in the next couple quarters.

Yeah, I mean, Shaun, I guess the challenge here has been, we do see the, you know, you're watching the weekly rig count, and the rig counts dropped pretty significantly, you know, since the beginning of April. So we're very cautious that we're not sure exactly what's happened. I mean, We've had operators that call us one week and say we're going to have to discontinue this project, and then they get a little relief on moving people in and out of some of the countries where we work, and they pick it up the next week. So it's really hard to get a clear picture of what's going on. But I will say we're coming off a quarter with good ROV utilization. We think market share will persist even as rigs drop. It's just I think the best thing I can tell you is keep an eye on what's going on with rigs, and we're likely to follow that account pretty closely. The vessel business I don't think will deviate much from the way it's paralleled the rig business in the past. We may see a little more brownfield activity on the vessels where people are doing some of the remedial work that they continue to do to keep that production going, even if big projects start to get stalled out because people don't want to make that capital expense. Our customers preserving money for those who are still paying a dividend or just really challenged to come up with the cash to do some of the big projects. So I think those things are the things to watch. That's the best thing I can tell you on granularity. And then as far as products go, yeah, same story, right? I think what we're seeing is we're seeing more delays than cancellations. So we do see things where people would like to slow down a little bit. But even that, in the manufactured products business, hasn't been tremendous yet. But, you know, stay tuned. I think everybody's still getting their feet under them and making those decisions.

Well, thanks. I appreciate that detail. I mean, the context is helpful. So then just thinking about the cost out initiative, you know, looking at your cost structure, as you've gone through this process, have you done much competitive analysis looking at what your fixed cost structure looks like relative to maybe Direct Comps or even just other public companies in your sphere. How does your cost structure look compared to peers? How will it look once you've completed this latest round? I guess I'm trying to get a sense for resizing the business relative to make yourself more competitive from a margin and returns perspective on a medium term basis. I'd like to learn more about that process and and how you've come to this level of cost that was being sufficient at this stage.

Sure. So we did benchmark against competitors, Shaun, and not just at sort of the G&A level. We actually drilled down and said what's our headcount and cost to serve in HR and IT and all different groups so that we can get that focus on those places where sometimes you don't always know exactly where you're being non-competitive. So we try to get that level of granularity So that we can attack those things effectively. So I think what I would guide to is I believe that the numbers we gave are in that range. We range from anywhere at midpoint, we would be at midpoint. And if we can hit the high end of those savings, we're going to be better than the peers. And I would say that we opened a pretty wide aperture for peers just to make sure that we were comparing against not just those that are close to us, but and some best-in-class industrials as well. So we're shooting for, I think, a pretty aggressive target when we get to the high end of that range. And, again, as the market changes and if we're perhaps a smaller company, as it feels like right now, that will be a more aggressive target, so we're going to have to keep working on that.

Understood. All right, thanks for the feedback.

Your next question comes from the line of George Orley from TM. P.H. & Co., your line is open.

Morning, George. Morning, Rob. Morning, guys. How are you all? Good. The first place I wanted to start off was you guys talked a little bit about incremental asset rationalization. You've already done some of that, and there were some asset impairments and write-offs, which is completely understandable in this environment. One, I just wanted to better understand How that impacts DDNA going forward, and then just kind of what types of long-lived assets fell in that write-off or impairment bucket?

Yeah, I'll take that one. The ongoing kind of DDNA, I'd say, you know, incrementally it's going to be another million and a half, a quarter, you know, reduction in depreciation. When I look at what kind of assets, some of it was shallow water vessels that we had that we took some impairments on was the primary component. So a lot of this was not assets that were actually being written off. This was assets that had impaired values going forward.

Okay, that's very helpful. And then if you think about the geomarkets across which you work today and kind of your global presence kind of a two-pronged question which offshore deepwater theaters do you expect to show the most resilience in in 2020 and part of that question is you know where would activity naturally hold up if crude oil prices were at uber low levels and some of that is also where you see in the biggest impacts driven by just COVID and the inability to get shift changes done efficiently and then conversely, which offshore geomarkets have you seen the greatest impact from both crude oil price and COVID and where do you expect to see the most incremental weakness as 2020 progresses? So apologies for multiple questions rolled into one, but it's all kind of tied together.

Wow, George, I wish I could give you like really good clarity, but as soon as I start talking about all the moving pieces, it's going to get really muddy. But I will say that Norway has just kept clicking as one of the places that we saw great opportunities in Norway, great activity there. So that's kind of a high point. And part of that is Thank you for joining us. Less indigenous workforce there. Even though we think we've done a great job, we still have people that need to rotate in and out. They go through long quarantine periods. It slows things down. We've been able to maintain business continuity, but it's at, I think, a more labor-intensive process because you've got so much inefficiency as people have to go through those quarantine periods. But when I compare and contrast these places, one of the things you also have to say is, There's ongoing commitments with the local governments that sometimes those commitments seem to be driving projects ahead to where the operators can't quite as quickly pull up stakes and move to the next thing or just conserve cash. They have to follow through on those commitments. So while some of those places are more challenging to work, they also have a little more inertia in the projects. And so, you know, Gulf of Mexico, we've been able to keep the vessels, our vessels going. Evolution's been able to Keep doing work. And so we've had good business continuity there. But then I think the operators in the Gulf of Mexico are more in control of their own budgets. So they're able to slow down and speed up and do things without as much, other than their partner agreements, not as much impediment, I guess, to making their own decisions. So it's a challenging question to answer, but right now I think it's still playing out. We see good things happen in a lot of places. One of the nice things is we haven't seen a big impairment in offshore wind activity in the North Sea. That's been fairly good, other than the small hang-ups with trying to move people around during COVID. For us, it's been great because we're listed as essential in almost all the work we do, even some of the entertainment work. and so we've been able to keep busy. We haven't seen, we've really seen very few work stoppages. We had a shift that wasn't able to come to work while they were deciding what the right procedures were but we were able to adopt new ways of working and keep people going to work and keep our customers working so that's been great.

And George, I want to add one component. I kind of got a little bit short on my answer as far as the asset impairments that we took in the quarter. We also had, you know, a fair amount that was in our subsidy product segment, most of which we call within our subsidy distribution, which is umbilicals and hardware related. So we took some impairment issues related to, you know, the facilities in Brazil, Angola, and in Rosyth. So that would be the other component.

Okay, that's helpful. Yeah, I noticed that $54-ish million impairment there. That definitely caught my attention. So that helps kind of square the circle there. Yes. I appreciate the color from you guys.

Thanks, George.

Your next question comes from the line of Mark Bianchi from Cowan. Your line is open.

Hey, thanks a lot. I guess just following up to some of the market commentary and questions about kind of how things could progress, I think what I'm hearing here is that maybe ROV probably has maybe the most downside and then ad tech would have the least downside and the other segments would be maybe somewhere in between with perhaps products maybe being closer towards the ROV side and then the other couple segments closer towards the ad tech side. Is that, as you see it, maybe a fair way to think about it or is there anything you'd correct in that summary?

Yeah, Mark, I think you've got them. We've just got to break up the mix a little bit. Government is probably the least affected. So you take split ad tech because government is probably the least affected. Entertainment is the most affected. That's not a probably. It's not a maybe because those parks, they just shut down. We couldn't get in to do work other than completing vehicles that we happen to be working on in our shops. They're just really shut down. Now, Longer term, we expect them to pick up and they'll find their way to serve customers again. We might get to participate in some of the, I would say, some of the technology or ingenuity they'll use to make it safe to get people back in the parks. So we were hoping to participate with that, but they're definitely the hardest hit. In the past, we've seen asset integrity get pretty hard hit because it seems like a lot of that is manageable cost for customers that they can postpone some of that activity and push it out. So they tend to see volume reductions happen pretty quickly. ROV gets a little bit, it's the same kind of thing, but they get a little more of a hangover because you've got to finish drilling the well or maybe they just want to get to a certain part in the campaign before they stop, so they get a little more run over. And then you're right, products runs longer because you're working on orders that have already been placed. We came out of the year with a pretty good amount of backlog, so we'll get to work through that. But we've seen this phase before, right? We've seen it where, say, survey and ROVs kind of get the first downturn in normal oil cycle, and then the product backlog plays out. That's fine. You get coverage for another year, but following that, when the orders don't come, then when ROVs are picking back up, then we start to see that low backlog or low absorption in the manufacturing side. But I think you've got it. I would just look at the finer points of ad tech and and maybe the star business, the service and rental business, which is really based on what the customers want to do because a lot of that is the well remediation, the light well intervention, stuff like that. If they've got a well that's shut in that's an important production, that could happen almost any time.

Okay. That's helpful. Thanks for that. I guess in terms of the Operating Leverage here. You guys have the cost cuts, which should dampen kind of the decremental margin effect somewhat. If I look back to 15 and 16, and I know things are choppy from quarter to quarter, but just looking back to those years, the annual decrementals that you had were kind of in the low to mid 30% range on an EBITDA basis. Should we expect you guys to do better than that now, just given this cost cutting program? Because I don't remember that we had a major I think it depends on how low it goes, right?

I mean, because we're starting from a lower point. But on the other hand, you can also take into account that I think we've got more of a floor support on price because our customers are understanding that We never got any price relief in the 18 and 19 time, really, nothing meaningful. So I don't think we'll see the same pressure that we saw in those years. And yeah, I think we have definitely done better at sort of the G&A and the structural part. So I think that'll be working to our advantage as well. But there will become a point if activity drops to some of the lower ends of the ranges that we've been hearing, It'll be hard to fight the decrementals if we get that low.

Yep. Makes sense, Rod. Thanks a lot for the comments.

Your next question comes from the line of Scott Gruber from Citigroup. Your line is open.

Hey, good morning, guys. Hey, good morning, guys. This is Justin Haas, Scott's associate on this behalf. Hey, Justin. So if... If you guys can help us understand the new cost-out program, does that 125 to 160 guide include the cost savings that were implemented in 4Q of 19 as well as 1Q of 20? Is that that 70 million? Yes, that's part of it. Okay. How much of that of the cost savings has been realized from those previous programs that have been implemented?

I would say it's predominantly the depreciation that was taken into account in Q4 of last year. Okay. We haven't announced any other programs. It's been kind of a fluid process. So most of the non-depreciation ones, we started some of it with asset integrity that Rod alluded to on the call last time. But it's just been a fluid process from the whole Q4 forward.

Okay. Appreciate that. And I know you guys said that the volume-related cost reductions are not included in that guide, but kind of given the current market activity, how much additional savings could you see from the variable side?

Well, I mean, that's going to be depending on the volume. So if FIDs don't happen with umbilicals or hardware being a key component and we see a significant reduction in activity there, that would be a tremendous – that's the savings we don't want to see, I'll say. That's going to impact top line as well.

Okay, and then just lastly for me is your CapEx looks like it's going to be kind of on a run rate basis, about $9 million a quarter for the remainder of this year. Just kind of wondering if that level is considered a sufficient maintenance level. And kind of if we move into 2021 with kind of a continued activity lag, is that kind of a run rate basis we can kind of model or expect for next year as well?

I think there's still a little bit of growth capex that's being completed here in Q2 associated with the drill pipe riser contract for Brazil. So I would say that the nine is not going to be amortized equally amongst the three quarters. It'll probably be a little bit more heavy in Q2 as that equipment is about to go on higher this quarter. I expect Q2 will have a heavier CapEx demand as we complete those assets, and then it'll be lighter in the back half of the year. And that would probably be more the run rate from a maintenance CapEx that you could look at modeling for 21. Okay, appreciate it.

That's all from me. Thanks. Thanks, Joseph.

Your next question comes from the line of Kurt Holling from RBC. Your line is open.

Hey, good morning, everybody, and hope all your family is doing well.

Morning.

Morning. And Marvin, congrats on your retirement. All the best. Thanks, Kurt. You're welcome. You're welcome. So, gentlemen, I'm just hoping that you'd be able to kind of help me with some of the logic that I try to run with all the information you guys provided, you know, in the press release last night and on the conference call today. But if I were to take all the components you provided in terms of the cost reductions and CapEx reductions and tax dynamics, so on, If I take all the midpoint of all those components, I think that adds up to around $80 million of positive cash contribution on a full year basis. Just wanted to double check to make sure my math kind of matched up pretty closely with the math you provided so far.

Your next question comes from the line of Mike Savilla.

What happened there? Well, I didn't think it was that tough of a question that you needed to cover up. All those components add up to about $80 million at the midpoint. Is that about right?

You're taking the amount from the CARES Act?

Yeah, I took that into account, kind of offsets your cash tax. I took the depreciation change and concluded that in that dynamic. So it took your OpEx, your CapEx, your cash tax, your CARES Act, and your depreciation, took the midpoint of all that. You add that up, that's about $80 million. Just want to make sure I was understanding the dynamic correctly as you thought about free cash flow for the year.

Impact of depreciation on free cash flow.

Well, again, you could back that out. So you'd be more maybe in the $40 million, $50 million range, right?

Something like that? Yes, I agree there.

Great. All right, thanks. And then just curious, on the last conference call, you guys suggested maybe a working capital contribution of $5 to $10 million for 2020. I know a lot has changed since that point in time, but you did indicate that In your commentary, you did expect a positive contribution from working capital in 2020. To what magnitude do you think that working capital contribution could be?

I don't think we're prepared to give a range, but we do still see it being positive. And fortunately, a lot of it's going to be generating cash through liquidation of receivables.

Okay, that's fair. And then just one last thing. So let's just say, you know, if we were to take a revenue decline, you know, the number doesn't really, really matter. So let's just say revenues go down by 20%, you know, on a broad brush. You guys indicated that a 30% EBITDA decrement on that per Mark's earlier question, you know, could be a reasonable starting point to kind of think about the impact on profitability. And then I was assuming we'd be adding back your operating expense savings, which again at the midpoint would be on an annualized run rate of about $100 million. So as I think about the exit on EBITDA, is the logic of that process correct? So the revenue decline, the decremental margin, then add back the operating expense savings, kind of look at that on an exit basis for 2020. Is that a fair way to look at it?

No? Yeah, I'm trying to follow all of that.

Say revenues decline by $100 million, your EBITDA will go down by $30 million, right? And then you've got cost savings on top of that, which is $100 million. So you basically add that $100 million onto that, and your EBITDA really doesn't go down by $30 million. It goes down by something less because of the cost savings. That's all I'm trying to get at, just trying to understand the logic on how you guys are thinking about it.

Is that right? Yes. Yes.

Okay. No, that's fine. Sorry about making it more complicated than it needed to be. All right. That's it. That's it on my end. Thanks, guys.

Your next question comes from the line of Mike Savella from Bank of America. Your line is open.

Hey, thanks. Appreciate the warning that I was coming next also. So as we kind of think through how the IMR market sort of develops, and I know it's pretty uncertain at this time, but if we just kind of think of a normal cycle, can you just walk us through IMR in a normal cyclical environment and then kind of in an environment where operators are shutting in wells versus an environment where they're bringing them back on?

I think, yeah, I think you hit on the important thing. I think that it'll be interesting to see if this plays out to be a normal cycle, because I think in a normal cycle, when we don't see wells getting shut in, we just see people managing the spend. We initially would see sort of a decline, just the knee-jerk reaction of, you know, stop everything, and we see a fall off in activity. And then when they decide that they've kind of restabilized the company at whatever the new oil price is, then it's one of the first things that comes back because, hey, you're talking about getting more production from infrastructure that's already in place. So it's generally the cheapest next barrel. I think it does pretty well. What could happen in this case is it could be, I would say, even more extreme, meaning – When you start shutting in wells, when you go to restart those wells, there could be additional work to do, right? And so I think when we think about especially some of the hydraulic work we do, some of the flow line hydrate remediation and things like that, I think you could actually see a bigger bow wave of that sort of activity that kicks in when you try to restart wells. So I think it's probably an exaggerated version of what a normal cycle would be.

It's helpful. It makes sense. And then, I'm sorry, I had to hop on a little late. Did you all walk through kind of how the cost cuts will focus on a segment, or should we just really think this is cutting across the board?

Yeah, I think you could think of it as more broad brush, Mike. because it really is, I mean, we've gone through a pretty significant org redesign. You know, we've got, like we've mentioned in the call, we're combining like with like. So trying to allocate those to one or the other, it's going to be less meaningful than just looking at overall what's it going to be because we're, for example, how much do you allocate to each group when you move three groups into the same facility? So those kinds of things look better from the top level.

That's great. Thanks a lot, guys.

Your next question comes from the line of Blake Gendron from Wolf Research. Your line is open.

Thanks very much. Good morning, guys. Appreciate the commentary on the covenant, by the way. Missed that. My first question is on the ROVs, kind of digging in there. Can you just update us on sort of the commerciality on the ROVs? you know the rigs followed side I would imagine there's a contractual component to that and it's going to be a little bit stickier because floaters you know kind of like what we saw in 15 should be bridged at least over the near term but if we do see you know rig terminations kind of in a lower oil environment how does that impact your ROV business are there is there any sort of termination payment component to that and then kind of following on that that that question I'm wondering what you can do in this downturn as offshore rigs potentially are stacked to gain share on the back end of this downturn as rigs go back to work.

Thanks.

Great, Blake.

There's no magic in termination fees or anything like that for us. Really, it's going to be when those rigs get termed and they quit working or even when they're contracted and they quit working. That's revenue loss for us. Working day is lost. So you just kind of watch the working rig count and you'll know how it's affecting that drill support side of our ROV business. The upside to market share and everything else is that we're really leveraging and we've been working really hard on remote operations, demanning some of the hybrid ROVs that we're using, some of the resident ROVs that we're using that can, number one, reduce carbon footprint because you don't have to have a vessel to support them, but also because we can be operating those from a few support centers around the world and getting people off the rig. I mean, we've already seen that get more interest than it ever has before as people start to realize moving people is hard to do, especially in a situation like this. So being able to have the people not have to travel, have the machines moving around or the machines already in place, I think that's what we're going to have to leverage. And it's also why, if you look at some of the – The new build capex, you know, not the maintenance capex, but the new build. That's where we're going to continue to put money is some of that automation, resident vehicle, those kinds of things that we believe are pertinent to the new oil field, not necessarily the way we've always done things in the past. So we're going to have to lean into kind of the leading edge of what technology is going to look like on the other side of this. And I think that's the plan. That's a helpful perspective.

In Advanced Tech, you gave us a good rundown of the government versus the entertainment business. It's been a focus of R&D spend to the degree that you guys focus on that, specifically on the software side. Wondering if there's any sort of change in focus, just given some of the uncertainty with not just oil and gas, but some of the markets globally. Do you plan on continuing to put R&D spend toward that part of the business more so now, just given that maybe it's a little bit More resilient in the current commodity table.

Oh, yeah. And I would say that, you know, even though from a technology standpoint, even though entertainment's challenged right now, if you look at the flip side of it, the software, the vehicle control systems, all the things we do to make those ride systems work for entertainment, that's all directly applicable. It's the same stuff we do in the HVB business. So continuing to invest in that, it's going to be, I think, again, just like I said about automation in ROVs, automation in the factories and everywhere else where we're going to be able to reduce the number of people that have to work elbow to elbow in a lot of these places by using some of the vehicle technology we have. I think that's the demand for that's going to go up. So we have to continue to invest. I really like what you've said around resiliency. I think it's very much the case for those two businesses.

Got it. Thanks a lot, guys. I'll turn it back.

Your next question comes from the line of David Smith from Heineken Energy. Your line is open.

Hey, good morning. I'm Dave Smith from Heineken Energy. I wanted to ask, given your significant cash balance and expectation of free cash flow for the year, I'm curious how you view the opportunity to take advantage of the wide discounts that your debt is trading at.

So, I mean, I'll jump in first and I'll let Alan finish the thought, but we are very much focused on opportunities there. I think we've talked about how use of cash has shifted and looking at our debt is really why we've carried those cash balances so far. Just trying to, during this time, this location, we've been trying to look at our best options because our bonds are pretty thinly traded. So whether or not we could make a big move on buyback bonds wasn't entirely clear to us. So we're evaluating options, but I think we see it very much the way you do. Alan, would you add anything?

No, I think you captured it quite well there, Rod. I think it's one that, you know, should we do anything, we'll report on it when required.

Appreciate it.

And I was going to ask if you're getting more traction with remote ROV piling. It sounds like you are. Just wanted to make sure I understood. Are you getting real interest in remote piloting for drilling support?

We can do it for some of the drilling support, but really platform work and things like that where we've got the ROV station for, I would call it, more intermittent work. is probably where we will see it most often. And that's where we can have that opportunity to be able to launch an ROV that's not as frequently used as it would be on a vessel especially, but on a drilling rig as well.

Great. Thank you very much.

Yep. Thank you, Dave.

Again, if you'd like to ask a question, please press star and the number one on your telephone keypad. Your next question comes from the line of Ian McPherson from Simmons. Your line is open.

Thanks. Good morning.

Rod, I wanted to ask you how you feel this most recent crisis has changed the calculus on industry-wide M&A. Obviously, you know, from our seats, we see the need for the industry to consolidate more and to rationalize overhead, et cetera. And from your seat, I know that Thank you for joining us.

Service companies, sort of our peer group, have gotten smaller, and the opportunity set, the activity levels, if we see a longer-term suppressed activity level, it just makes good sense to try to find those partnerships and those combinations. Challenge, you nailed it. I mean, there's two challenges. Number one, you want to find things where like for like is there, so you get the synergy. You don't just get the G&A bump. Looking for those things and then trying to strike on, we're going to have to stabilize a little bit because I would say it takes a while for us all to believe that this is what our value is. It's been a tremendous shock on share price since the beginning. That's got to settle in and not just the realization for ourselves what it is, but also that we believe that the relative values have settled out so that those combinations can happen. I think it's just a matter where we have to get the timing right. I would tell you from an oceaneering standpoint, just when we look at that, I think the first order of business is to do exactly what we're doing. If you want to be, for example, if you want to be a consolidator, you have to prove that you can do all the things it takes to be a good consolidator. And that's exactly what we're doing today right now is combining our own like for like, rationalizing our facilities, being really good at making these things work together, having the functions that work across the organization that can serve all different businesses with a centralized function. I think those things are what may kind of give you the right to be out there in the market looking to do some of those deals in the future. So even though we're waiting for some of that other stuff, I think we are definitely preparing the company to be able to do that when everybody's ready to go. Got it.

Thank you, Rod. And then, Alan, I had a follow-up for you. We've already kind of tackled to some degree the guidance questions. But just on free cash flow for the year, obviously starting at a deficit in Q1, We assume, I assume anyway, that EBITDA is probably degrading sequentially through the year, so we would look for probably a good free cash flow print in the second quarter, probably with some working capital to release to help de-risk that target of free cash flow, neutral or positive for the year. Is that a fair assumption that Q2 should be a pretty significant reversal of the cash movement that we saw in Q1?

No, I think it's going to be more Q3, Q4, because I think Q2, as I alluded to, we will have heavier capex in Q2 than we do in the back half the year. We anticipate getting some of that cash tax refund in the back half the year as well. And with lower levels of revenue, we should be able to generate more from our balance sheet in the back half the year as well. Revenue hasn't dropped that precipitously yet, so. That'll probably be a back half of your story.

Okay. Thanks for that clarification. Thanks for the answers today, guys.

Yep.

Thanks, Ian.

There are no other questions at this time. I'll turn the call back over to the presenters.

Thanks, Marcella. Well, since there are no other questions, I'd like to wrap up by thanking everybody for joining the call. And this concludes our first quarter 2020 conference call. Thank you, everyone.

This concludes today's conference call you may now disconnect.