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.