Oceaneering International, Inc.

My name is Tabitha and I'll be your conference operator. I would like to welcome everyone to the Oceaneering's first quarter 2021 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.

Thank you, Tabitha. Good morning, everyone, and welcome to Oceaneering's first quarter 2021 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, 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 recent directly comparable gap 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 Rod.

Thanks, Mark, and good morning, everybody. Thanks for joining the call today. We're pleased to be sharing with you today our first quarter 2021 results, which reflect another quarter of operating discipline and incremental efficiency gains. While significant challenges remain with regard to the COVID, confidence is returning to the markets as demonstrated by increasing demand. The developing demand recovery combined with continued OPEC plus discipline has created more stable industry fundamentals, thereby supporting the expectation of increasing levels of activity for most of our traditional services and products over the next several years. Today, I'll focus my comments on our performance for the first quarter of 2021. our consolidated and business segment outlook for the second quarter of 2021, and our improved consolidated 2021 outlook, as well as thoughts on how we're supporting our customers with their lower carbon and energy transition needs and efforts. Now for the results. For the first quarter, we reported a net loss of $9.4 million, or 9 cents per share, on revenue of $438 million. These results included the impact of $3.2 million of pre-tax adjustments associated with restructuring and other expenses and foreign exchange losses recognized during the quarter. Adjusted net income was $2.8 million, or three cents, per share. We've continued to improve our operating performance by driving operational efficiency, led by focusing on safety, quality, and value-based solutions for our customers. I'm pleased with the rate of progress made during the first quarter of 2021, which enabled each of our operating segments to generate positive adjusted operating income and adjusted EBITDA, and our adjusted consolidated EBITDA of $52.8 million surpassed both our guidance and published consensus estimates. Based on our first quarter results and revised outlook, we are narrowing our expected adjusted EBITDA range to $180 to $210 million for 2021. Now let's look at our business operations by segment for the first quarter of 2021. Subsea Robotics or SSR adjusted operating income was flat on slightly higher revenue. Our SSR quarterly adjusted even a margin of 32% was consistent with recent prior quarters as pricing remained stable. Operating activity in our SSR segment exceeded our original expectation due to higher than forecast ROV drill support days and survey activity. The revenue split between our remotely operated vehicle or ROV business and our combined tooling and survey businesses as a percentage of our total SSR revenue was 78% and 22% respectively compared to the 80-20 split in the immediate prior quarter. As we had anticipated, ROV days on hire declined as compared to the fourth quarter due to expected lower seasonal activity. Days on hire were 11,887 as compared to 12,456 during the fourth quarter of 2020, with an increase in drill support days on hire only slightly offsetting the decline in vessel-based services days. Our fleet use was 64% in drill support and 36% in vessel-based services versus fourth quarter fleet use of 60% and 40% respectively. For the first quarter, we maintained our fleet count of 250 ROV systems, and our fleet utilization was 53%, down slightly from 54% in the fourth quarter of 2020. Average ROV revenue per day on hire of $7,874 was 7% over $7,325 achieved during the fourth quarter. The sequential increase in revenue per day on hire was primarily due to favorable geographic mix and higher mandates associated with certain work scopes, for example, installation and reactivation activities. Overall, we continue to characterize pricing as stable. At the end of March, we had ROV contracts on 78 of the 135 floating rigs under contract, or 58%. flat with 58% at December 31, 2020, when we had ROV contracts on 75 of the 129 floating rigs under contract. Subject to quarterly variances, we continue to expect our drill support market share to generally approximate 60%. Turning to manufactured products, our first quarter 2021 adjusted operating income declined, as expected, from the fourth quarter on lower segment revenues. Adjusted operating income margin decreased to 4% in the first quarter of 2021 from 9% in the fourth quarter of 2020, which had benefited from favorable contract closeouts and negotiated supply chain savings that did not occur in the first quarter. Activity in our mobility solutions businesses remained weak during the first quarter of 2021. Our manufactured products backlog on March 31st, 2021 was $248 million compared to our December 31st, 2020 backlog of $266 million. Our book-to-bill ratio was 0.6 for the as compared with a book-to-bill ratio of 0.4 for the year ended December 31st, 2020. Offshore projects group, or OPG, first quarter 2021 adjusted operating income increased on substantially higher revenue. Revenue benefited from the startup of field activities on the riserless light well intervention project in Angola. The sequential increase in adjusted operating income margin from 2% in the fourth quarter of 2020 to 10% in the first quarter of 2021 was due to increased utilization of assets and personnel while holding indirect costs stable. Mexico or GOM activity during the first relatively flat with the fourth quarter of 2020 as higher amounts of installation work were offset by lower amounts of intervention, maintenance, and repair or IMR work. For integrity management and digital solutions or IMDS, first quarter 2021 adjusted operating income was higher than fourth quarter of 2020 on flat revenues. The improvement in adjusted operating income margin from 3% in the fourth quarter of 2020 to 5% in the first quarter of 2021 benefited from the continuing transformation of how and where work is performed, which is driving more effective use of personnel. Our aerospace and defense technologies are ADTEC first quarter 2021 adjusted operating income marginally improved from the fourth quarter of 2020 on flat revenue. Adjusted operating income margin of 19% was consistent with that achieved for the fourth quarter of 2020. Unallocated expenses of $31.7 million were lower as compared to the fourth quarter. During the first quarter, we utilized $1.7 million of cash in operating activities as the annual payment of accrued employee incentive awards related to the attainment of specific performance goals in prior periods was mostly offset by good operating performance. In addition, $10.7 million of cash was used for maintenance and growth capital expenditures. These two items were the largest contributors to our $9.3 million cash reduction during the quarter. At the end of the quarter, we had $443 million of cash and cash equivalents, no borrowings under our $500 million revolving credit facility, and no loan maturities until November 2024. Now I will address our outlook for the second quarter of 2021. On a consolidated basis, we expect our second quarter 2021 results to improve with adjusted EBITDA in the range of $55 to $60 million on sequentially higher revenue. For our second quarter 2021 operations by segment, as compared to the first quarter 2021, we anticipate for SSR we are projecting higher seasonal activity in our ROV survey and tooling businesses to drive higher operating profitability. ROV days on hire are expected to increase in both drill support and vessel-based activities. SSR adjusted EBITDA margin is forecast to remain consistent as compared to the first quarter. For manufactured products, we anticipate lower revenue and operating profitability. We are encouraged by recent award activity in our energy products business. However, we continue to expect muted activity in our mobility solutions businesses. For OPG, we anticipate higher revenue and adjusted operating results. We expect a seasonal pickup in IMR activity in the Gulf of Mexico, and in addition, work on the riserless light well intervention project in Angola is expected to continue through the second quarter. For IMDS, we expect higher revenue and relatively flat operating results with operating margins being relatively consistent with the first quarter of 2021. For ad tech, we expect higher revenue and relatively flat operating results. We expect a change in project mix with growth in engineering, operational, and submarine repair services for the U.S. Navy and lower contribution from our space business. Unallocated expenses are expected to be in the low to mid $30 million range. Directionally, for our full year 2021 operations by segment as compared to 2020, we expect for SSR, we expect adjusted operating results to improve on slightly higher revenue. ROV days on hire are projected to remain relatively flat with some minor shifts in geographic mix. Results for tooling-based services are expected to be flat with activity levels generally falling ROV days on hire. Results are expected to improve on higher levels of activity. SSR forecasted adjusted EBITDA margins are expected to remain consistent with those achieved in 2020. For ROVs, we expect our 2020 service mix of 62% drill support and 38% vessel-based services to generally remain the same for 2021, with higher vessel-based percentages during the seasonally higher second and third quarters. We estimate overall ROV fleet utilization to be in the mid to high 50% range, again, with higher seasonal activity during the second and third quarters. We continue to forecast that our market share for the drill support market will remain in the 60% range for the foreseeable future. As of March 31, 2021, there were approximately 14 oceaneering ROVs on board 13 floating drilling rigs, with contract terms expiring before a third quarter. During the same period, we expect 35 of our ROVs on 29 floating rigs to begin new contracts. For manufactured products, we expect segment revenue and adjusted operating performance to decline year over year, primarily as a result of the decreased order intake in our energy businesses during 2020. We are encouraged, however, with over $135 million in contract wins during the first four months of 2021. which is expected to drive increased activity in the second half of 2021. We continue to see marginally higher activity and contribution from our mobility solutions businesses in 2021, but order activity is expected to remain muted until 2022. We forecast that our operating income margins will be in the low to mid single-digit range for the year and segment book-to-bill ratio will be in the range of 1.1 to 1.5 for the full year. For OPG, we expect a meaningful improvement in adjusted operating results on higher revenue. The biggest contributor to the expected increase in activity in this segment is the resumption of business to a more normalized level, which was adversely impacted in 2020 due to uncertainty and low oil prices coupled with the impacts of COVID. Most noticeably, the Rigelous Lightwell Intervention Project in Angola, which was delayed in 2020, is expected to continue through the second quarter of 2021. and based on a more stable and higher oil price, we expect a seasonal pickup in IMR activity in the Gulf of Mexico, which was muted in 2020. Utilization of our vessels, both owned and chartered, has improved to the point that may lead us to enter into spot charters on an as-needed basis this year. As has been the case over the past several years, much of our Gulf of Mexico work continues to be call-out in nature and therefore sensitive to current oil price. For IMDS, we expect an increase in revenue and adjusted operating income. We expect higher revenue in the back half of the year as we work on incremental contracts booked during the fourth quarter of 2020 and the first quarter of 2021 ramp up. We forecast that our adjusted operating income margin will increase throughout the year as we continue to drive more efficiency in this business. Adjusted operating margins are expected to average in the high single digit range for the year. For ad tech, we expect higher revenue with operating results and operating results with operating income margins consistent with those achieved in 2020. We continue to see good growth opportunities in our subsea defense technologies business. While we were disappointed that the Dynetics team did not win the recently announced human landing system contract with NASA, the loss of potential work on this project does not change our overall expectations for segment improvement in 2021. Our estimated organic capital expenditure total for 2021 remains between 50 and 70 million dollars. This includes approximately 35 to 40 million dollars of maintenance capital expenditures and 15 to 30 million dollars of growth capital expenditures. We forecast our 2021 income tax payments to be in the range of 40 to 45 million dollars. In addition, we expect to receive CARES Act tax refunds of 28 million dollars during the year. Unallocated expenses are expected to average in the low to mid $30 million range per quarter. Now turning to our balance sheet, with $443 million of cash at the end of March and the expectation of generating 2021 free cash flow in excess of that generated in 2020, we are well positioned to address our 2024 debt maturity. We continue to actively review this situation to formulate our strategy on how and when we will address this pending maturity. And as a reminder, we continue to have our $500 million undrawn revolver available to us until November 2021 and $450 million available until January 2023. And now I'd like to make a few comments on how we're enabling necessary changes in the energy industry. The continued expected energy demand increase will open up numerous opportunities for companies focused on delivering the cleanest, safest forms of energy on a reliable and sustainable basis throughout the whole supply chain. There are inherent challenges with each form of energy, but as Oceanary has done throughout 50-plus years, we will continue to adapt and lead. The past few years, we have made significant strides in developing enabling technologies to assist our customers in attaining their stated net neutral carbon goals, such as remote piloting, machine vision, and machine learning applications, commercialization of our Liberty and ISRIS-class robotic vehicles, the development of the soon-to-be commercial Freedom robotic vehicle, facility footprint optimization, and more efficient facilities, transforming the manner in how and where we work, focusing integrity management and digital solutions, or IMBS, on digital and software-enabled predictive analytical models, the addition of a recent Jones Act vessel outfitted with the most fuel-efficient engines, and additionally, we're leveraging all of these capabilities in growing our government-based and other non-energy businesses, just to name a few items. Most, if not all, of these play an important role in assisting our customers in achieving their stated carbon goals, especially as it is related to work in developing and maintaining their offshore assets, regardless of whether the energy they are producing comes from oil, gas, wind, or hydrogen. IMDS also plays a pivotal role in maintaining our customers' onshore facilities. As you can see, we are continuing to evolve to support our customers' and society's clean energy goals. In summary, our first quarter performance and refreshed outlook for the year give us confidence to narrow our 2021 adjusted EBITDA guidance to a range of $180 to $210 million. The general macro environment for our energy businesses has improved, and we're cautiously optimistic that activity levels will also improve in the back half of this year and in 2022, assuming that the commodity price remains sufficiently strong and stable. Growing our business profitably remains a primary focus for us, and we are continually looking for ways to demonstrate the quality of our services and products while increasing the value proposition for our customers. I am proud of the resiliency that our management employees have shown in navigating the changes and challenges of the past several years. Despite these challenges, we have strengthened our service and product offerings and balance sheet to position the company to succeed in the evolving market environments. And I would also like to recognize an Oceaneer who has left an indelible footprint on Oceaneering. As many of you have seen, John Huff will be rolling off our board of directors in May and will be succeeded by Jay Collins as chairman of the board. John's leadership and vision helped transform us into the respected and recognized services and product leadership company we are today, never compromising on safety and always committed to increasing the net wealth of our shareholders. Thank you, John. As a final reminder, our focus continues to be generating positive free cash flow in 2021, maintaining our strong liquidity position, and improving our returns. We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you might have.