Oceaneering International, Inc.

My name is Lindsay and I will be your conference operator. I would like to welcome everyone to Oceaneering's third 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, Lindsay. Good morning and welcome everyone to Oceaneering's third quarter 2020 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website. With me 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 third quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Good morning. Thanks, Mark, and thanks, everyone, for joining the call today. Today I'll review the details of our third quarter results, and I'll provide you with outlook commentary and guidance for the fourth quarter of 2020 and for the full year of 2021. And after my closing remarks, we'll open the call for questions. So to start with, I'm pleased to report that our third quarter 2020 results reflect the benefit of previously disclosed cost improvement initiatives and the recently announced realignment of our segments. Despite continuing energy and entertainment market headwinds, we generated free cash flow and both adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, and adjusted operating income improved as compared to the second quarter of 2020. I'm proud of how our employees have stepped up to the challenges brought on by the global pandemic, operating model changes, and cost improvement initiatives, all the while continuing to deliver quality services and products to our customers safely and with minimal logistical delays. Now, looking at our third quarter 2020 financial results. Our adjusted operating results exceeded our initial expectations and consolidated adjusted EBITDA of $45.1 million exceeded published consensus. Overall, we were encouraged by the performance of our energy businesses and the stable contribution from our aerospace and defense technology segment, or ADTEC. Compared to our adjusted second quarter 2020 results, consolidated adjusted operating income for the third quarter 2020 improved by $5.1 million, as efficiency gains from our cost-out efforts are meaningfully enhancing our bottom line results. Each operating segment reported positive adjusted operating income and adjusted EBITDA. Sequentially, the adjusted operating results for each of our segments, except subsea robotics, improved as compared to our second quarter 2020. Our cash position of $359 million at September 30, 2020, increased by $25.3 million from June 30, 2020, as we generated $19 million of free cash flow, largely driven by positive contributions from operations and working capital and ongoing capital conservation. Now let's look at our business operations by segment for the third quarter of 2020. Subsea Robotics adjusted operating income declined by $1.3 million on flat revenue as compared to the second quarter 2020, primarily due to lower contributions from our tooling and survey businesses. Due to this lower contribution, Subsea Robotics adjusted EBITDA margin decline for the third quarter 2020 as compared to 32% in the second quarter 2020. For the third quarter 2020, the revenue split between our remotely operated or ROV business and our combined tooling and survey businesses as a percentage of our subsea robotics revenue was 83% and 17% respectively, the same as the prior quarter. Our third quarter ROV performance was comparable with the second quarter 2020. As of September 30, 2020, our ROV fleet count was 250 systems, the same as June 30, 2020. Our fleet utilization during the third quarter 2020 was 59%, the same as the prior quarter. Days on hire were 13,601 in the third quarter as compared to 13,501 in the second quarter. Average ROV revenue per day on hire was marginally lower, declining 1% sequentially, primarily due to the changes in geographic mix. Our ROV fleet use mix during the quarter was 56% in drill support and 44% in vessel-based activity as compared to 64% and 36% respectively in the prior quarter. The average number of working floating rigs during the third quarter 2020 was 85 as compared to 96 during the prior quarter, which led to fewer days on hire for drill support services. However, this decrease was offset by an increase in days on hire for vessel-based services. During the quarter, our drill support market share decreased to 57% with ROV contracts on 76 of the 133 floating rigs under contract at the end of September. This compares to a 62% drill support market share with ROV contracts on 86 of the 139 floating rigs contracted at the end of June. Subject to quarterly variances, we continue to expect our drill support market share to generally remain in the 60% range. Turning to manufactured products, sequentially, third quarter 2020 adjusted operating income improved slightly on a 10% increase in revenue. Much of the revenue increase was attributed to percentage of completion revenue recognition on certain lower margin project components in our umbilical manufacturing business. During the third quarter, COVID-19 had limited impact on our energy manufacturing business, but continued to adversely affect manufacturing timing in our non-energy entertainment business. Overall, for year-to-date 2020, reduced order intake in our energy-related manufacturing business is primarily attributable to significant decrease in final investment decisions undertaken by our oil and gas customers due to low oil demand and pricing. Our manufactured products backlog at September 30, 2020, was $318 million compared to our recast June 30, 2020 backlog of $380 million. During the third quarter, order intake was $49 million. Our book-to-bill ratio year-to-date was 0.4, and for the past 12 months was 0.5. Sequentially, offshore projects group adjusted operating results improved on flat revenues. Call-out work during the third quarter was relatively consistent with the second quarter 2020, with improved results benefiting from the cost-outs and operating synergies implemented in connection with our new operating model. The impacts of COVID-19 continue to delay the Angola Light Well Intervention Project, but we are optimistic that this work will begin to move forward either late in the fourth quarter 2020 or early in the first quarter 2021. For integrity management and digital solutions, adjusted operating results improved sequentially on flat revenue. These results were largely due to improved execution as second quarter adjusted results were impacted by non-recurring costs on certain completed projects. Our aerospace and defense technology segment reported slightly higher sequential adjusted operating results for the third quarter 2020 on slightly higher revenue. ADTECH represented approximately 19% of our consolidated revenue for the third quarter, and we appreciate the relative stability of these businesses considering the challenges currently faced in our energy businesses. As previously announced, we were awarded two meaningful contracts during the quarter. one in our space systems business, where we will be teaming with Dynetics in support of developing a human lunar landing system for NASA, and one in our defense subsea technologies business, where we will be operating and maintaining the U.S. Navy's submarine rescue systems for up to five years, assuming annual contract renewals. Unallocated expenses for the third quarter 2020 were lower than the second quarter 2020, due primarily to lower accruals for incentive-based compensation. Capital expenditures for the third quarter 2020 totaled $8 million as we continue to exercise strict capital discipline. For the nine months ended September 30, 2020, we generated $32.4 million of cash flow from operating activities and spent $45.8 million on capital expenditures, resulting in a net use of cash of $13.5 million. At the end of the third quarter, we had $359 million in cash and an undrawn $500 million unsecured revolving credit facility, providing us with strong liquidity. Now I'll address the outlook for the fourth quarter of 2020. With the onset of lower seasonal offshore activity and customer budget exhaustion negatively affecting our energy businesses, we believe our fourth quarter 2020 results will decline sequentially. We are expecting lower operating results in each of our segments except manufactured products. Unallocated expenses are expected to approximate $30 million. During the fourth quarter, we expect to generate positive free cash flow, which will benefit from positive changes in working capital and CARES Act tax refunds. By segment, for our subsea robotics segment, we are expecting lower revenue and operating results due to fewer utilization days in connection with reduced seasonal demand for vessel-based ROV services, tooling services, and survey services. We believe that the working count for floating drilling rigs has largely stabilized over the past few months, and we will not see a marked decline in working count during the fourth quarter. We are forecasting our overall ROV fleet utilization for the quarter will decline to the low 50% range, and we project EBITDA margins will decline to the high 20% range. For manufactured products, we expect higher revenue and operating results due to increased throughput on certain percentage of completion projects in our umbilical manufacturing business. We project operating margins to remain in the mid-single-digit range. Order intake is expected to remain at subdued levels in our energy manufactured products and entertainment businesses. For offshore projects group, we expect a decline in revenue and operating results, primarily attributable to lower anticipated levels of call-out work being performed in the U.S., Gulf of Mexico. For integrity management and digital solutions, we expect modestly lower revenue and operating results during the fourth quarter. For aerospace and defense technologies, we expect operating income to be flat to slightly down on higher revenue. The revenue increase is primarily attributable to the startup of several new projects across our ad tech businesses, with the implied lower operating margins resulting from startup costs and change in project mix. For the full year of 2020, we expect to generate adjusted EBITDA in the range of $165 to $175 million. We are narrowing our guidance range for capital expenditures to $50 million to $60 million. We affirm guidance on cash tax payments in the range of $30 million to $35 million and our expectation of CARES Act and other tax refunds in the range of $16 to $34 million. We continue to expect generating positive free cash flow for the full year of 2020. We announced a plan at the end of first quarter 2020 to reduce 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. We estimate that, since launching this plan, approximately $100 million of annualized cost reductions have been initiated exclusive of depreciation, with additional savings expected to be achieved through the fourth quarter of 2020. We continue to estimate that the cash costs associated with these actions to approximate $15 million for 2020. And now looking ahead to 2021, we anticipate the oil sector will face continuing headwinds in 2021 due to uncertainties around demand recovery and the resulting softness in energy commodity prices. Despite this backdrop, we currently expect our consolidated activity levels and EBITDA performance in 2021 will closely resemble 2020. We also expect to generate significant free cash flow in 2021, which will also benefit from a working capital release associated with final project milestones in our manufactured product segments. We will continue to review our forecast as we develop a definitive operating plan for 2021, and we will update our expectations during the year-end reporting process. And in conclusion, this has been a challenging year for all of us. Oceaneering has responded to these challenges by instituting significant structural cost reductions and reorganizing our business segments to capture operating synergies and operate profitably in a lower activity market. Thanks to the hard work of our dedicated team, these actions are showing quantifiable results as evidenced by our expectation to meet or exceed 2019's adjusted EBITDA performance in 2020 and maintaining or improving this performance in 2021 despite continuing energy market headwinds. We remain focused on generating free cash flow. Preserving and improving our liquidity and balance sheet remains a high priority. The firm capital discipline policy we adopted in 2020 is delivering results, which we expect will provide meaningful free cash flow in the future and gives us the flexibility to address our revolving credit facility maturity in January 2023 and our $500 million senior notes maturity in November 2024. We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you may have.