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?