Oceaneering International, Inc.

My name is Megan and I will be your conference operator. I would like to welcome everyone to Oceaneering's second 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 now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations.

Thanks, Megan. Good morning and welcome to Oceaneering's second quarter 2020 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website. Joining us on the call today are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments, and Alan Curtis, Senior Vice President and Chief Financial Officer. 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 second quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Good morning, everybody, and thanks for joining the call today. So before I start with the prepared remarks, I want to take time for a thank you to our Oceaneering employees, our customers, and our fellow offshore service providers for coming together the way they have in the second quarter to work safely and perhaps in ways that we may not have previously envisioned. This is the spirit that's made this industry great, and together we're going to continue to make a difference and make the industry better and safer than ever before. So thanks again to everybody. Now to my prepared remarks. Today I'll review the details of our second quarter 2020 results. I'll provide you with the general outlook for the second half of 2020, and I'll give you an update on our expense reduction activities. After that, I'll make some closing remarks and open the call to your questions. So for our second quarter summary results, considering all the uncertainty surrounding the crude oil markets and the COVID-19 pandemic, we were satisfied with our adjusted operating results. For the quarter, we generated adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, of $40.5 million, exceeding consensus estimates, and we generated $26.9 million of free cash flow. These positive results were partially attributable to our actions to substantially reduce structural costs in light of an expected continuation of lower demand for our services and products. The positive effect of these cost reductions is reflected in our 9% consolidated adjusted EBITDA margin for the second quarter of 2020, which declined by only 14 basis points as compared to the first quarter of 2020, despite a 20% decrease in revenue. I'm also happy to say that these benefits have been widespread, with each of our operating segments except Acid Integrity generally maintaining or increasing their EBITDA margins during the second quarter as compared to the first quarter. As expected, compared to the first quarter of 2020, the aggregate results of our energy segments declined during the second quarter of 2020. However, this decline was partially offset by improved performance in our non-energy segment advanced technologies and lower unallocated expenses. We did experience some operational disruptions and delays due to COVID-19 during the second quarter, but the safety protocols that we and the industry put into place in response to the pandemic limited impacts to our employees and our customers. Sequentially, consolidated adjusted operating results declined by $4.4 million and each of our operating segments, except Acid Integrity, generated positive adjusted operating results in EBITDA. Our second quarter adjusted EBITDA of $40.5 million exceeded consensus estimates and we generated $26.9 million of free cash flow. We had $334 million of cash and cash equivalents at quarter end. Now, let's look at our business operations by segment for the second quarter compared to the first quarter. ROV adjusted EBITDA margin remained relatively unchanged at 31% during the second quarter as compared to 32% achieved during the first quarter of 2020. Sequentially, revenue declined by 12% principally due to a 9% decrease in ROV days on hire and a 3% quarterly decline in average ROV revenue per day on hire. The decline in revenue per day on hire resulted from fewer mobilizations and increased standby days and revenue, all of which are included in the calculation. Pricing concessions during the second quarter were not noteworthy as we continued to progress our expense reduction initiatives. As a result, and as expected ROV adjusted operating performance decreased declining by $2.5 million. This decrease resulted from fewer working drilling rigs which yielded lower days on hire for our drill support services that were only slightly offset by a marginal seasonal increase in days on hire for vessel based services. Our fleet use during the quarter was 64% in drill support and 36% for vessel based activity compared to 68% and 32% respectively for the first quarter. Fleet utilization decreased to 59% from 65% in the prior quarter due to the decrease in days on hire. At the end of June 2020, our ROV fleet size remained at 250 vehicles, the same as it was at the end of March 2020. Our drill support market share at the end of June was 62% with ROVs on 86 of the 139 floating rigs under contract. This compares to our first quarter market share of 61% of the 159 floating rigs contracted at the end of March. During the quarter, our customers adapted quickly to the lower commodity price environment with the number of working floating rigs falling from an average of approximately 121 for the first quarter of 2020 to approximately 96 for the second quarter of 2020, a 21% decrease. Turning to subsea products, during the second quarter, adjusted operating results declined by $5.3 million on a 33% decrease in revenues as compared to the first quarter. Persistent cost reduction efforts helped us to achieve an adjusted operating margin consistent with the margin generated in the first quarter of 2020. Revenue in our manufactured products business was impacted by the delayed receipt of materials, customer-driven project delays, and decreased working hours due to COVID-19. Revenue in our service and rental businesses declined slightly due to decreased activity levels. I do want to highlight that during the quarter we performed our first Drill Piperizer, or DPR, work scope in Brazil pursuant to our previously announced four-year services contract. Our subsea products backlog at June 30, 2019 was $486 million compared to our March 31, 2020 backlog of $528 million. As expected, there were fewer bookings during the second quarter as many of our customers delayed investment decisions due to the uncertainties regarding oil prices and potential COVID-19 related operating risks. Revenue replacement during the quarter was 67%. and our book-to-bill ratio for the trailing 12 months was 0.83. Sequentially, Subsea Project's quarterly adjusted operating results improved $1.3 million on an 8% reduction in revenues. Revenue declined due to decreased customer activity. Customers were quick to respond to falling oil prices by reducing the amount of call-out, inspection, maintenance and repair, or IMR work. We were pleased that adjusted operating results improved as a result of better project execution and ongoing cost reduction activity. Asset Integrity's adjusted operating results declined sequentially on lower revenue and as a result of non-recurring costs on certain completed projects. For our non-energy segment, Advanced Technologies, second quarter adjusted operating results improved $1.7 million sequentially due to solid performance of our government businesses. COVID-19 continues to adversely affect our commercial businesses. However, cost reduction measures implemented during the first quarter of 2020 limited the financial impact on our second quarter 2020 results. Unallocated expenses for the quarter were sequentially lower as the return on market-based assets held in a trust for the benefit of certain post-retirement obligations improved as compared to the first quarter. Additionally, we had reduced information technology costs during the quarter. And now for our outlook for the second half and full year of 2020. Although we are encouraged by our second quarter 2020 results, uncertainty remains for the rest of 2020. Many of the markets we serve will likely continue to be impacted by the effects of and associated responses to COVID-19, as well as potential reductions in customer spending as a consequence of the volatility in the macro drivers surrounding oil and gas commodity prices. Directionally, we expect continued softness in the demand for our services and products within our energy businesses. Additionally, COVID-19 challenges will potentially affect the timing of our light well intervention project in Angola and near-term demand in our entertainment ride business. On a positive note, we do project good performance from our government businesses, which are not driven by commodity prices, and we expect our manufactured products backlog to support good activity levels through the remainder of 2020. Given customer spending uncertainty and potential COVID-19 challenges, we are not providing segment financial guidance for the third quarter, second half of 2020. We affirm that unallocated expenses are forecast to be in the high $20 million range per quarter for the remainder of 2020. For the full year of 2020, we affirm our expectation to generate positive free cash flow for the year, capital expenditure guidance in the range of $45 to $65 million, our cash tax payments guidance in the range of $30 to $35 million, and our expectation of CARES Act tax refunds guidance in the range of $16 million to $34 million. And now for an update on our expense reduction initiatives. In our first quarter 2020 earnings release and conference call, we outlined our plan for a targeted reduction of annualized expenses in the range of $125 to $160 million by the end of 2020, inclusive of $35 to $40 million of reduced depreciation expense. As a reminder, we classified these efforts into four general categories as follows. Efficiency enabling projects, which some may describe as process improvements, and rationalizing facilities. Simplification of our operating structure, compensation reductions, and other cost reduction activities including supply chain savings and the elimination of non-productive assets. We classify the majority of these cost reductions to be structural in nature and therefore do not expect them to return when activity picks up. These cost reduction efforts are progressing well, and we estimate that since launching these efforts, approximately $85 million of annualized cost reductions have been initiated, with additional savings expected to be achieved throughout the remainder of the year. I'd like to emphasize that this $85 million does not include the $35 to $40 million in reduced depreciation expense that we announced last quarter. So, when you add these together, we have reached $125 million for the lower end of our range. We continue to expect the cash costs associated with these actions to approximate $50 million in 2020. In summary, Considering all the challenges we face going into the second quarter, we're pleased with our results. Much work remains to be done, of course, but I'm very proud of how the Oceaneering team has responded to the realities of the markets we serve. Preserving our liquidity and balance sheet remains a high priority in the current environment. We expect to generate positive free cash flow for the full year of 2020 based on the actions we are taking to drive meaningful customer interactions, to enable our customers to adapt to new ways of working and achieve their decarbonization goals through digitization, automation, and remote operations. Continue to focus on our quality commitments. Expand our operational excellence efforts. Achieve targeted cost reductions, reduce capital spending, lower cash taxes and our expectation for CARES Act tax refunds, and generate cash from working capital. We appreciate everyone's continued interest in oceaneering and will now be happy to take any questions you may have.

At this time, we would like to take any questions you may have. To ask a question, please press star 1 on your telephone keypad. Our first question is from Sean McKeem with J.P. Morgan. Your line is open.

Hey, morning, Sean.

Morning. So thank you for the clarification on the DNA portion of the cost-out program versus the $85 million level to date that was in the release. I think that's helpful. Could we maybe just dive in a little more into the cost out program? What are the major buckets that are left to get to your current target? And then what else do you see as out there? We're still in a challenging environment for offshore for the next six quarters, which I think is a reasonable chance that's the case. What other incremental opportunities are you Evaluating, pursuing, how do we think about the next opportunity set besides what you've laid out here so far?

Great, Shaun. Well, I appreciate the question. I'll start with when you ask kind of where the major buckets are. It is fair to say that they are quite evenly distributed across all of our segments. So, you know, everybody, and I think that shows in the second quarter where Sort of the margin maintenance appeared everywhere, so I think the goodness is evenly spread. Maybe there's a little less in the government side of ad tech just because we actually see some opportunities there and that strength came through this quarter as well. So we haven't been as aggressive there because there's actually good bid activity there. So maybe a little less so there, but the rest is pretty widespread. When I think about what's left out there to get, I think some of it is timing. We talked about facilities as one of the examples. Some of the facilities, while we've identified them, they just take a while to go get because we've got lease terms and we're looking at subleases and things like that. So stuff like that is harder to get. as opposed to the compensation reductions and some of the other things we've done which were sort of the quicker gets. And so I think that's out there. When you ask me what's left, I think the good news is that we've still kind of got the tools in our hand. And so if we see continued challenges through the back half of the year or next year, I think we're at the ready. And I would expect it to be Pretty targeted around any sort of regional or segment declines we see. You know, places like if we see that, you know, you can't afford to stay in a certain region because we've just sort of dropped subscale, those actions would need to be taken. And that's actually been a big part of the success so far is being, you know, very surgical around regional operations. You know, going in and looking at the whole of the activity there for oceaneering operations consolidating as best we can and then making the hard decisions about whether that consolidated, aggregated result still suggests that we should be there. So I think that stuff continues to happen and that's where I'd see we pivot if we need to do more. And again, to go capture the rest of what we're after. Alan, you're nodding a little bit. Would you add anything?

You hit the nail on the head. I had my notes down here as well and I said the next thing we're looking at obviously is regional locations, facilities, We started in the Far East as we announced, I think, two calls ago. So it's continued to evaluate, make certain that we're in the right places to support the levels of business. You know, if they're suboptimal, you know, we're taking a harder look at each of those locations. And process enablers as well. I think that's something the team's been working on throughout the organization, whether it's in the back office or whether it's on the front lines. It's how can we be more efficient at what we do? We're working As Rod indicated, operational excellence has long been a tenet here at Oceaneering as well as the quality tenets, and we're going to continue to try and focus on that.

Got it. Thank you both for that feedback. I think that's helpful context. So then just thinking about the free cash flow guidance, it would be great just to maybe unpack what do we think is A good operating free cash flow number, so maybe excluding working capital and tax items and kind of what that break-even level is for an operating free cash number. And then just one other component to that is the CapEx guidance. So CapEx guidance is 45 to 65 for 2020. You spent $38 million year-to-date, so really what you're saying is second half 20 CapEx is a range of 7 to 27. Can you talk about what drives that range there for the back half of the year?

I'll start on the CapEx side. Obviously, it's going to be more maintenance CapEx driven. I mean, as Rod indicated, we did get the first system on the drill pipe riser successfully working on contract. So we're very pleased with that and obviously capitalized it. You know, there's very little growth CapEx in the back half the year. You know, as we flex up, there could be some. We have a little bit left on some of the drill pipe risers that we're still completing, but most of it's going to be maintenance CapEx. We're still working on the Freedom Vehicle that we've been highlighting on a couple of calls. That is still... are going to have some CapEx associated with it, as well as maybe a little bit on the Liberty or some of the ISFRS-type systems, kind of the next-generation ROVs that we're continuing to invest in, and then the technologies associated with them. So I think the seven is probably more on just the pure maintenance, and if we had some other interest, we could flex it up a little bit if we need to. So I'd kind of go towards the midpoint in the 55 range is kind of where we're guiding. You know, looking at free cash flow, you know, obviously you can pull out the CARES Tax Act. You know, we got it $16 to $34 million. You know, that is kind of a one-time event this year that we're looking at. So we're uncertain as to the timing of when all of that cash will come in, certainly driving for it this year. But we are, you know, subject to what the IRS is Ability to get all of this processed at the same time. Part of that could roll over or bleed over into 21 as well. The other components, notwithstanding working capital, which is one of the bigger levers that comes out, Shaun, is just working capital on reduced levels towards the back end of the year. It should free up cash.

All right, fair enough. Thank you. Yep.

Your next question is from Taylor Zerger with Pickering Holt. Your line is open.

Hey, thank you and good morning. I wanted to ask first on subsea products. Bookings this quarter were expectedly low and the revenue was down quite a bit sequentially, but the backlog position is still very healthy and I'm just curious if you could help us think about the revenue progression in that segment, at least over the back half of the year, just coming out of backlog. Is there any way you could help us think about that?

Yeah, when you look at the second quarter, Taylor, it was down a little bit, as you noted, and a lot of that had to do with the timing of receiving materials coming from some third parties. Party suppliers, you know, we still expect that will be executed here in the back half of the year. There's more timing than anything. So when I look at the back half of the year, it's going to be certainly going back to a more traditional 70%, 75% manufactured products and probably 25% to 30% service and rental. So it will be skewed more back to a manufactured products revenue stream. in the back half of the year as we put more into the umbilicals and the backlog that we're going to be executing from backlog, as we talked about in the call notes.

Okay. A follow-up is more high-level, and it's on the ultra-deepwater activity environment in general. I mean, clearly, the pandemic created the sort of perfect storm for deepwater activity to plummet over the past few months, and at these sort of commodity prices. We're probably still headed lower from here, but it does feel like we probably overcorrected to the downside a bit, just given some of the logistical headwinds in place from COVID-19. And so I'm curious if you think that's the case as well, and if there's any markets out there where maybe there's a few rigs that had to go on standby or temporarily idled as a result of the pandemic that you might see return to work over the back half of the year.

Yeah, I'll take that, Taylor. Hey, one of the things, I think you're right, and it really speaks to our hesitance to give guidance because I think there's room for this market to move either direction, right? And so while we, I don't think we see a whole lot of things other than the delay we called out in the work in Angola or some of the things that we face in the entertainment business, trying to go back to work in China with entertainment vehicles, We've got upside. We've got upside on the government side. So I think our uncertainty really lies in the market dynamics, which I think everybody is facing right now. You call it well. We could have overshot the mark in deep water in all the examples I would use. We saw effects in Norway, for example, where Norway, I would say they stumbled for a short time, but now Norway is working very well. Brazil, while they've had probably even more disruption because, you know, we've had times when they went out to the rig, they found one COVID case, they clear the whole rig, they clean everything out, they test everybody, and they go back to work. They're down for, you know, 10 days to two weeks, and then they go back to work. And we feel like the work in Brazil is going to persist. So, you know, maybe less affected by commodity price than other places. So there are Thanks for the answers.

Your next question is from Mike Sabello with Bank of America. Your line is open.

Hey, good morning, everyone. Good morning. I was kind of wondering if maybe we could dust off sort of the discussion around possible debt tenders here. You know, maybe the window was never open before. Bond prices have come down a little bit again recently. Do you guys think there's another opportunity to move here? You know, and if not, How do we think about optimal capital structure for Oceaneering over the next couple of years, just with all the cash sitting on the balance sheet?

I'll take the first part at least and maybe let Alan take that second one. But I think, yeah, we're still leaning in. I mean, we're still looking for opportunities. Our debt that comes... have the 24 maturity especially. We just think that if there's a good price on that or if there's opportunity to move, and of course there's a number of ways to address that debt, but we're getting everything that we can do and again watching the market to see when that opportunity arises. So that could be a good side of a soft market for us and some others that have the wherewithal to act. So I think that is definitely on the on the watch, so to speak. Alan, you want to talk about debt structure generally?

No, I think really it is, you know, is there an opportunity to act? I think at the same time it's, you know, how does the revolver play into the debt structure? How do we maintain liquidity? How do we get beyond the 24s? Certainly looking at each and all of those things over the next, you know, I'll say 24 months with the revolver coming up in January of 23. So, We're very pleased with our liquidity position today, but we recognize we need to address that not too far out from where we are today, just to make certain that we can see an upside in this market. We do see that we will have to go back to the markets, and revenue will return. As we indicated in the call notes, we are working on how do we improve the top line, not just take costs out at Oceaneering. While we are generating from working capital today, I do see down the road it is something that we need to be able to have the flexibility to address is increasing revenues at the same time. So, I think that's one of the key elements we're trying to blend into our overall discussion on debt is looking at the upside that could be coming in the coming years. So, I think...

Thanks for all that. Could we just, you know, I guess a point of clarification on the cost cuts, and I'm sorry if you gave it already, but the $85 million number, was that kind of a run rate heading into third quarter, or was that what you all realized, you know, to your benefit on, say, call it EBITDA in 2Q, and if it was kind of a quarter end, how much of that? Is there any sort of just straight carryover impact into 3Q that we should be considering?

Yeah, so when we talk about that, Michael, we're really talking about the cost-saving initiatives we've taken. And like any of the things we do, if we go and make a, for example, a compensation reduction in the second month of the quarter, we don't realize the full benefit of that. So there's varying degrees of that. So when we get to 85, that 85 really represents an $85 million annualized cost out for oceaneering. How much of that we'll realize in the quarter kind of depends on when it happens in the quarter. And so when you get into the third quarter, we'll start to see more of these things get realized. We'll also see more of these things get initialized. So there's a growing wave here of things that are happening. And we expect that by year end, whatever number we come up with, whether that 85, we get to the top of our range, including the decreased depreciation expense, If we hit the top end of that range, we do expect that most of that annualized number would be realized in 2021. Perfect. Thanks a lot.

Your next question is from Ian McPherson with Simmons. Your line is open.

Thanks. Good morning, Rod and Alan. On ad tech, my notes may have been screwed up from last quarter, but The performance of Q2 was a good to better than I've been expecting and recognizing that the government side is the much bigger piece of it. Do you see a repeatability more or less or even in the same zip code of the first half results from Ad Tech looking into the second half notwithstanding the fact that some of your entertainment business is still experiencing COVID headwinds in the second half?

No, I... I think, Ian, that what we can expect is that nothing happened in Q2 that isn't repeatable in the sense that I think our cost cuts on the commercial side are durable. I don't know that given everything that's going on with COVID that I could say that especially the entertainment business is going to have a strong recovery in the back half of the year unless we have some pretty major good news coming out of, especially out of China. So that one kind of looks like we're steady state to Q2 and on the government side, you know, the government business has been strong. We've got good bid activity there. We've got strong performance within the business. So, yeah, I think Q2 is repeatable if not beatable.

Good. That's helpful. Thanks. And then the main value drivers in oil field being ROV and products for the time being, for ROVs, If we're, for example, contemplating a continued glide down with activity, as rig count probably suffers a little bit in the second half, the EBITDA decrementals that we saw from Q1 into Q2, which was kind of 45% decrementals, taking your margins down two points. To me, that's how I would think about modeling the decrementals going forward, which would put me into kind of 27%, 28% EBITDA margins. Later this year, does that make sense to you, or do you think that with the cost outs that maybe you could do a little better than that?

I think that, again, when we talk about cost outs, and I know the question came up earlier, when we get to the level of, you know, post-85 we take it out, we're talking about process improvements, we're talking about some other things. Not just headcount cuts, for example. And so I think we will continue to work on that. I don't think it would be a lot worse, but we've got to really count on more incremental benefit from our cost improvement maybe is the way to put it when we talk about process change. We've got to keep after that because, like you said, there's a trend there that we've got to get ahead of.

Yeah. Thanks for all the color and insights today. Appreciate it.

As a reminder, if you'd like to ask a question, please press star-fold for the number one on your telephone keypad. Your next question is from Babs Vashinov with Scotiabank. The line is open.

Hey, guys. Good morning, and thank you for taking my questions.

Hey, good morning, Babs.

Good morning. Can you speak about just the governance, what you have around the debt today? and how you stand and if there are like any adjustments that are allowed in those covenants?

Yeah, that's, you know, with our debt covenants, you know, we have a debt to total cap which is on an adjusted basis as you just indicated. So, you know, the impairments that we've taken in the last couple of years, you know, are added back to the overall equation. As the covenant stands, it's on a total debt to total cap adjusted at a 55% level. If you do the math, we're probably in the low 30% range. So we do not feel like we're at any risk on the debt covenants.

And it also means that we have access to our revolver, the full amount of our revolver. Correct. As an anecdotal way of looking at it.

Can you speak about the Angola project work? It seems like it's been pushed back from 2Q into... Can you speak about when can we expect that to start happening?

Go ahead, finish the question.

Also, I was just going to ask about the hedges, just given one of your larger peers has had many issues with Angola and Kwanzaa, just what the hedges are in place.

Sure, so I'll start with the certainty. I mean, our biggest thing there is actually the customer wants to do the work, we want to do the work, but mobilization right now has been challenged. It's a pretty big spread that's there, but we've got people that need to come in, we need to get it mobilized in Angola, and then we need to have sort of a window that we believe that You're going in and you're working on, in some cases, live wells. You need to believe that you're going to be able to finish the work. You don't want to get started and not be able to finish. We're looking for that window where we believe the COVID situation in West Africa is stabilized to the point where we're comfortable that we'll be able to execute the whole project. That's more of a win, but I can't tell you for sure whether it'll be I think it's going to be tough for us to complete in 2020, but we're hoping that we can at least get it started. Again, that one's pretty wide open based on COVID, which is very hard to predict. From the hedge standpoint, I would tell you that most of our contracts, especially in West Africa, our currencies are matched to our costs pretty well, so there's a built-in edge in the contract. We don't believe that When this contract is executed, that will be left with any undue quant exposure because I think we're pretty well matched in currencies to what we'll spend and what we'll receive.

Okay, that's helpful. And maybe if I can squeeze in one more. So it sounds like obviously third quarter is typically seasonally strong, but obviously given the macro, we don't really know. But it sounds like In the energies business, in each of the business, it could be modestly down from 2Q to 3Q. Maybe products is flat to modestly up. And advanced technology, maybe it's flat to modestly up. Is that a fair way of looking or characterizing the next quarter?

Yeah, I think so.

Go ahead, Alan. Jump in.

No, no, I think you called it. And I think, you know, products being up is certainly, you know, Somewhat of a little bit of a slide from Q2 into Q3 on some of the raw materials that we didn't get in in Q2 that we anticipated to put into the production process. So we anticipate those will happen in Q3, which will drive top line but very little bottom line impact at all just because the nature of the materials we're putting in. So it could impact top line, but I wouldn't drive a lot of... Profit From It.

And like advanced technologies, like the government business can offset the commercial aspect?

I think what I would look at is very similar to kind of the Q2 aspect where we had low levels of entertainment and commercial business. Similarly, I would think it'd be led in Q3 by the government businesses.

All right. That's very helpful. Thank you for taking my questions.

Thanks, Babs.

Our final question comes from Blake Gendron with Wolf Research. Your line is open.

Hey, thanks, guys, for getting me on here. Just wanted to swing back to ROVs and specifically on the margin. It looks like 800 bps of margin degradation from pricing, at least if implied day rate is sort of a proxy for pricing, obviously offset by a lot of the cost out that you continue to take from that business. If I look at first half margins, though, Relative to an implied day rate that's an all-time low, the margins on the EBIT side are fairly high for ROVs in the first half versus certainly the 2018 trough. You've rationalized the fleet. It's more capable. It's probably lower cost. But appreciating you are adding some auxiliary services now just to maybe sweeten the deal. And then in the context of the drillers likely not taking any lower pricing just because they can't, I'm just wondering... You know, modeling on the implied day rate and how that impacts the margin, what we should expect, you know, even in the worst case scenario for activity in deep water. Just some of the puts and takes and your thoughts around ROV margins would be really helpful.

Sure. So let me start with the day rate. We scrub the day rate pretty hard because, like you said, if you kind of take out the drop in number of days, it looks like we got a hit on day rate. And that's actually not the case. We held day rate really well. But we consider an active day even when we're on standby. and so what we did have this last quarter and as you might expect COVID related where you know we were moving people in and out they had trouble on the rig getting people in and out even if they weren't oceaneering folks and so we had more standby days either you know getting the rig mobilized or demobilized and so those standby days go into the mix at a lower rate so it looks like a lower price but it really we haven't had to make price concessions and Unfortunately, I think we're in that rig category where you just can't go much lower. That's been pretty stable. Going forward, I think we're just going to have to keep challenging ourselves to do better. Some of the things that we can do to deliver the same value to the customer, we've been touting what we can do remotely, meaning we can have fewer people on the rig because you mentioned this sweeten the deal. We can We can have guys that do two jobs. They can operate the tooling. They can operate an R-WOX or an I-WOX system. They can do some of the communications work. So they can do some of the survey work. So being able to have multi-purpose players that reduce the cost to the customer, they also reduce the cost to Oceaneering, and we share in the benefits. I think that's where those kinds of things are the things we're really going to have to push to drive margin in the future, along with the technology side of remote operations. Those things are important, and I believe they're achievable because, again, there's benefit to both us and the customer. And when we talk about that kind of scraping the bottom on price, that's one of the benefits we can, one of the cost benefits we can give to the customer without it necessarily being a lose-lose situation.

Got it. That's helpful. I did want to revisit the cost out program and just put a fine point on maybe some of the language around what you mentioned. So $85 million, you know, appreciating that you already have the depreciation piece in hand, the $85 million, is that of today or is that quarter end? And then when you say initiated, is that that the processes are in place and, you know, maybe you're not realizing the full $85 or have you already realized the full $85? I guess I'm just asking in the context of My notes here, I think you previously mentioned 54 or so million annualized at the end of the first quarter. So just trying to understand from a timing perspective, it seems like you're getting out ahead of the cost cut timeline. And then I'm wondering, too, if we kind of stay in this unpredictable environment, if there's upside to that all-in 160 number moving forward.

No, so you're on the right track. So when you think about the 85, think about 85 being at the end of the quarter, we had processes in place to capture $85 million annualized, but we didn't get the full goodness of that all through Q2. So when you take those things, they should add more goodness to Q3 than they did in Q2, plus we want to add more to the 85 identified. So it's a growing number. and the way I would think about it is if we hit the 160, including the depreciation expense reduction, if we hit the full 160, that's something that we should be able to realize most of, if not entirely, in 2021. So as that number grows, it is sort of a leading edge, but we keep adding to the mix of what's in there, plus we get to realize more and more of the benefit of that in each subsequent quarter. So you got it. The other thing I would say is, what about the 160? I think if we see challenges and we start to see, and I think we mentioned this earlier on the call, but we need to be very specific about, we need to go back to regions, we need to go back to contracts, we need to We need to improve processes, not just cutting costs, but improving efficiencies. So some of those process improvements take a little bit longer to ramp up. Sometimes a facility, we've got to run out the lease expenses so we can move out, we can shut off the lights, we can not have all the care and maintenance, but it takes a while to get out of the full expense of a facility, as an example. So all of those things, what I think going forward is if the market gets tougher, surely there's going to be more opportunities where we can say, you know, this has gone upside down. We can take that cost out. We can continue to be very surgical about going out and taking out places where it's no longer a viable option for us to be there or it's just subscale.

So, Blake, I want to try and be clear, though. When we're looking at, in Q1, we identified it as being 70 million. That moved to 85. We're trying to say these are structural. This is not the variable cost associated with going and performing a job. That would be even a bigger number. So we're trying to be focused on, you know, what is sustainable, cost out, structurally driven cost that, as Rod said, would not return in 2021.

Got it. Yeah, no, that makes sense. I just wanted to make sure it was point in time and not quarterly average. And then to your point about variable costs on top, I mean, even if you pull out those structural costs, the decrementals are still, you know, really good in the second quarter. So definitely understood on that and appreciate the commentary. You know, if I could sneak one quick one in here just on energy transition, obviously it's Topic du jour while activity levels and the outlook are still relatively subdued. Can you just remind us, you know, specifically in projects where you play in some of the renewable space and maybe what some of your leading edge conversations are with customers or potential projects in that?

So projects is a place, one of our biggest operations, though, is ROE support to the So we are supporting a lot of the big vessels that are out there doing wind projects, particularly in the North Sea, so the European sector. We've got great relationships with the major contractors there, so that's been good. You probably remember we bought ECOS, which is route clearance, so that's got some trenching and some boulder removal or boulder clearance and things like that, so we've got work there. Projects as well, I think we are highly... transferable skills. We have some highly transferable skills to go into that marine environment, so we look at more of that. I think surveys is probably one of the places we participated most, and our survey group has been more involved in, say, the East Coast United States work than some of the other groups, so that's kind of the pointy end of the sphere there for us. And then asset integrity. I mean, as we get into more IMR and inspection work for installed base, and that installed base continues to grow. We believe that we'll be able to apply more of our asset integrity and asset management skills to that part of the work. But it is growing. Our relationships are growing. We invest in that side of the business in the sense of finding people that are more familiar with that part of the business so that we can go out and pursue more of the work. But I think penetration has been good. And I think it's, you know, generally it's a good thing for the oil field because we've got so much experience in marine construction that we could actually accelerate the transition there and get offshore wind going faster than if we just depend on sort of a new group of players. So mostly good news for our sector.

Excellent. Excellent. Really appreciate the update, guys. Thanks.

Yep. Thanks, Blake.

We have no further questions at this time. I turn the call back to Rod Larson for closing remarks.

Great. Well, since there are no more questions, I just want to wrap up by thanking everybody for joining the call, and this concludes our second quarter 2020 conference call. Thanks, everybody.

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