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.

At this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. Your first question comes from the line of Mike Sabello, Bank of America.

Hey, good morning, everyone. Morning, Mike. Morning. So I was wondering if you could maybe just talk, you know, just kind of a little bit on the guide, you know, a narrowing of the range, really sort of bringing up the bottom end. But if we just kind of look at the second half and take what, you know, what you all did in 1Q and 2Q guide, you know, it looks like the bottom of the range might, you know, might imply just kind of a step down from where we are today. Can you just talk us through some of the things that could, you know, potentially bring bring you to the bottom end of the range and, you know, kind of how we should be thinking about that?

Yeah, I think we're really, and Mike, it's not really a new story, I guess. There's a couple of new things. But first of all, about the standard stuff, the call-out work, In the Gulf of Mexico, if something were to happen, and of course we've seen, you know, so far everything has been going well with permitting and work getting done in the Gulf of Mexico. But with the administration, we take a cautious look at that, make sure that our customers can continue working. But as long as that happens and we've got a good commodity price, I think we'll see good activity. So while that's out there as a possibility, I think we do feel good that that activity will stay strong. The other thing that we're looking at is how much can we put into the plants. We've got the umbilical plants, which generally have a longer lead time in manufactured products, but we've also got the other businesses, Greylock in particular, the connector businesses, that can do a faster turn. So if we can get more throughput there, that again brings us up, so there's a little bit of risk waiting there. And then just generally, you know, again, kind of going back to some of the same old stories, we've got some big deliveries for manufactured products in the back half of the year. And we just need to make sure that the customers are ready to take those on. And I think I'm not questioning whether or not we can get that out of the plant. It's just what happens when we're finished. So we got some fourth quarter stuff going there. And, of course, just the total level of activity in Q3. I think that should give you a pretty good feel for where we see the uncertainty, at least in the back half of the year. I would call it more to the upside maybe than the downside, but those are the variables. Alan, would you add anything?

No, I think it's just really the uncertainty. Right now we certainly see a stable oil price that's benefiting us. Should something happen, we talked about OPEC Plus stability that's really brought to the markets. That's something that in the event something changed like we saw last year, whether it's COVID or OPEC Plus, that could drive markets down. And some of those things that we traditionally say move the fastest, typically our OPG business, would be impacted if that was the case. If we see the continued stability in that price, you know, I'm with Rod, I think, you know, we'd be looking more towards the upper end.

Got it. Understood. And then if we could just kind of switch gears and maybe just a longer-term question around, you know, subsea robotics margins. We don't have a whole lot of history to go off of given the resegmentation last year. You know, you all right now are kind of sort of near where the peak of anything we've seen from you guys reported so far. If we think about that segment sort of longer term, where can margins get to in subsea robotics? What is more normal? It's kind of medium term for that segment.

I think a lot of the upside to I don't think comes from some big, strong market-driven rebound where there's scarcity and prices get moved up. I wouldn't look for big movement there. I'd look for incremental improvements with technology. And as we start to offer more of the differentiated products like Icerus and Freedom and more survey work in the mix, I think those are the things that are going to drive margins up. But it's not going to be wild swings like when the rigs were scarce and RVs were scarce. I think you watch the technology improvements. I think that's what's delivering value for our customers. And it's not just on the market. not just on the downmanning and some of the other things that we see from those products or available vessel days. There's a carbon play here that's really important to think about with Liberty and Freedom, where we can offer our customers a solution that really does reduce their carbon footprint. And if you're buying carbon credits to offset that, that has a real financial value. So I think that's where I see the changes happening. But those are slow, steady changes. They're not some whipsaw market kind of thing that I'd be looking for.

Understood. Thanks, everyone. Yep. Thanks, Mike.

Your next question comes from the line of Ian McPherson with Simmons.

Thanks. Good morning, Rod. Good morning, Ian. I'll repeat the same question around potential conservatism with the guidance. In debate, let's just exclude the possibility that the world relapses, but in your base case, that's not that. What else besides the LWI contract expiring in Q2, what else is an obvious minus in the second half versus the first half? I just don't see it in any of the segments. Maybe a little bit in products, but... But just a follow-up on that point.

And you know our story really well. So I'll just say the last couple of years, we had some nice long-season work. Some of it was hurricane activity and others that drove some OPG work from third quarter to fourth quarter and gave us the back half was just stronger with a longer season. It was kind of unique to the last couple of years. We haven't seen that every time. cautious about how much fourth quarter activity we'll have. So that's probably the biggest thing when you're trying to compare year over year and you're looking at that. I'd just say we're going to have to see if we get the benefit along with a strong, steady oil price, right? And that's another thing. A more stable oil price could also help us in the back half of the year, but we're going to have to see how that plays out. So we are being cautious, and you kind of picked the right spot.

So really focus on OPG as the biggest wild card then.

OPG and Subsea Robotics do to the same extent because they get that boost from weather and seasonality and just some of the same work that OPG does also affects them, especially here in the GOM.

Okay. Okay. Caught your press release recently on the Jan through April orders and products of 135s. I either misheard or was confused by your comment in the prepared remarks on book to bill for products for this year, if I could ask for a repeat on that. Sorry. Yeah, we got it to a 1.1 to 1.5 for the full year. Book to bill. Okay. So quite an acceleration there from trailing order rates.

One thing you continue to see, though, is a lot of these awards are very lumpy. So, you know, if we continue to see our customers progress with FIDs, a couple of these are pretty substantial in nature. So when we get the bigger awards, that's when you'll see the inflection points, I think. Good. Thanks, Alan. Thanks, Rod.

Got it.

The next question is from the line of Taylor Zarsha.

Hey, good morning, and thank you that the Manufactured Products Awards that you talked about are obviously really encouraging to see. And just more broadly in your deepwater-oriented segments, could you help us think about where you're seeing the most shots on goal as we progress through 2021? It feels like Brazil is probably at the top bright spot right now, and that's likely to continue. But are you seeing any sorts of green shoots activity in other regions around the world, like particularly West Africa and even in the Gulf of Mexico from a deepwater activity perspective?

I would say, yeah, you know, we see – and one thing is the Norwegian continental shelf continues to be pretty steady, so that's been good. Projects there have been holding in green shoots, you know, things that spike out. Obviously, you said Brazil, but Latin America. I mean, the northern South America up in Guyana and Suriname, that continues to be a very positive thing. Thinking about the whole Gulf, for example, you know, that energy reform has been strong and there's been good things happening in both Mexico and the United States. So I would think about some of the projects that are happening there. So, yeah, West Africa, there's good things happening. Actually, I would call it just all of Africa. We've got some things going there. But again, there's some challenges in Africa. So you take the puts and takes. It's hard to say that as an overall, it's going to be really strong. I would say it's more the other places that we talked about. You probably caught it that Like Tal's force majeure in Mozambique, they've got to get some things cleaned up there. But that's not unusual for that part of the world. We've got some rebalancing all the time, but we'll watch that space to see if they could get to the right side of that, it could be good.

Okay, that's helpful. And my follow-ups in IMDS, I realize it's a smaller earnings contributor, but the margin progression on basically flattish revenue has been really nice to see. In the past, you've talked about building pipeline of opportunities in that segment. So I was just wondering if you could give us an update as to what you're seeing ahead of that segment and maybe talk a little bit about, you know, how you're transforming the way you're doing work such that margins continue to improve moving forward.

Yeah, sure. And thanks for asking. I mean, it is one of those things that we haven't talked as much about in the past. But it is, you know, that moving from just being an inspection – more inspection work to more that integrity management work, more predictive modeling. We talked about bringing the work to people where, you know, doing more remote access to the assets and then sending the data to be worked onshore. So instead of bringing people to the asset, we're bringing the asset data to the people, and that efficiency change has been great. But also, we've got, I think, a stronger handle on the value proposition for the customers. We've been able to penetrate new customers and grow in different markets. So I think getting a more global footprint has been an opportunity for growth there. But the real prize to me is moving up the value chain. It's really moving from inspection to integrity management. We talked about machine vision, machine learning, artificial intelligence, predictive modeling. That's where that business needs to continue to grow. And we've got great people in place to do that. Talk about both the technology and the application of the technology. So that's what we see as the promise to keep moving the margins there and to continue to grow the business.

All right, good to hear. Thank you.

Yep, thank you.

Your next question comes from the line of Blake Gundren with Wolf Research.

Thanks. Good morning. Yeah, thanks. I just want to come back to the OPG segment. You know, some variability. It sounds like some upside potential. A nice handoff between Angola and the IMR call-out work potential here in the back half of the year. I'm just wondering, first on the profitability profile of those two things, you know, if we see Angola roll off and see IMR pick up, is that going to meaningfully change segment margins? And then, you know, Seasonally or otherwise with strength and commodity, what kind of follow through could we potentially see in IMR in 2022? I know you're one of the few companies that endeavors further out guidance, so maybe you have some visibility into this.

Let me start with the handoff. I don't see dramatic shifts there. So in margin shifts, I do think that we do need the activity levels to make that so. So we have to get the utilization of assets. And that's really where that magic happens. And we mentioned that a little bit about getting the assets that we currently have under contract pretty fully allocated, and then being able to add to that capacity with spot charters will be a big part of hitting those kind of the high end of OPGs possibilities for the second half of the year. Farther out, I just wouldn't say it. I mean, the campaigns tend to be, you know, tend to be hard to predict. I mean, when they come, they're good. You work on them, but, but a lot of times they're, they are price sensitive and they're budget sensitive. So you don't, I wouldn't, I wouldn't venture to predict them out too many quarters, but Alan, anything you'd want to add to that?

Yeah, I would add, you know, one thing that I've, I was remiss in saying earlier was when you look at the first half of the year versus the back half in OPG, not only is it the well intervention project that we have that generates a lot of revenue here in the first half, but we also have the field support services contract that we're executing that's, you know, predominantly in the first half of the year. It goes into July kind of timeframe. So, you know, when you kind of look at the revenue step down the back half, you know, those are two pretty substantial projects that we're working on in the first half of the year that, you know, certainly does not replicate itself in the back half. So we need to see more of that call-out nature IMR type activity in the back half to supplement it. So that kind of is part of why we don't have this great visibility into those markets right now. They tend to be a little bit shorter duration phone calls that we get.

That's totally fair, and I appreciate the detail. I wanted to come back to capital allocation. You mentioned the 2024s and some of the optionality that you're going to be looking to attack that maturity. You noticed or you called out the step down in borrowing capacity on the revolver. I think you mentioned late 2021. Obviously, you've got some great organic growth avenues here, especially in your non-energy segments. Would M&A be a reason to potentially get after that maturity or not sooner rather than later? Are there any opportunities, say, in some of your non-energy businesses where M&A could be a a foremost capital allocation driver for you?

I think there is, Blake. And when we think about those, they don't tend to be big transformational things. They tend to be ways that we can go pick up technology that we can use kind of within our core competency, particularly marine. So I think those are the kinds of things we'd be looking at there. It always, I mean, optionality, preserving optionality is always a big part of what we're thinking about when we talk about, you know, retiring debt early, addressing the debt, you know, adjusting maturities, things like that, so access to capital. But I think we still are operating on, first and foremost, getting to a leverage ratio that, you know, the investors are comfortable with and then kind of setting that as our new normal as we go and pursue growth opportunities.

Makes sense. Appreciate the time. Thanks.

Your next question comes from the line of Samantha Ho with Evercore ISI.

Hey, guys. Thanks for taking my question. I just have a couple of real quick ones on SSR. You called out how your survey worked in the first quarter a couple of times, and I was just wondering if you could elaborate on what that is being driven by. I'm kind of curious if this is your traditional oil and gas customers or if it's also benefiting from maybe some of the energy transition type of work?

No, right now, most of this is in our traditional businesses. You know, we have done work in the offshore arena for that transition into wind and East Coast wind specifically, but the work we're doing here is predominantly with traditional customers.

And are customers sort of taking advantage of just lower pricing, or are they just thinking about maybe getting back more aggressively offshore?

I would say it's more zooming activity, Samantha, than it is any sort of kind of opportunistic capture of price. It's the first step, so I think it bodes well for the rest of our businesses as well.

Okay, great. And then the other question is, with your newer ROVs that you highlighted. Curious where those ROVs are working right now and what sort of costs it would be to have more of those sort of the liberty, freedom type assets?

Sure. Well, let me start with Liberty. Liberty is being used primarily in the North Sea, and it's an opportunity for the customers who know that they've got installed asset base subsea that they can leave a Liberty system without having a boat there to tend it, if you will. And it can communicate via a buoy to the surface. It's got battery power that can continue to do work and do monitoring exercises while other things are happening in the field or while they're doing production tests or what have you. So that reduces the costs. quite a bit by allowing them to not have the cost of that boat or the carbon footprint of having that boat there. So that's an opportunity there. That system, because of the handling system and everything else, and the fact that almost all of these vehicles are in some way, shape, or form reverse compatible with the exception of Freedom, We utilize a lot of spares, a lot of existing vehicles to build these systems. So the cost is pretty manageable. It's not a huge capital expense given kind of the options. So that's going on, and it's good news when it happens. If I use the ISRIS, ISRIS is an interesting one because it has got a lot of repurposed equipment in a system. So the cost for us to put an ISRIS system on is very cost-effective. And it's a great benefit to our customers because they see the value in it can actually operate in higher currents, which means if you are – and most of these are offshore wind installers. And so we're leasing these directly to the vessel owners and the installers themselves, and we can get them more days of operation per year by being able to operate the ROVs in higher weather conditions. So you can see where that would be a huge value if you've got a vessel out there that otherwise would only work, let's say, 200 days a year. If you can get them to 250 days a year, that utilization is much, much better. So we're looking at things like that. Freedom is a step change. It's a whole different thing where we leave a vehicle resident in a lot of cases or we're using it to do different types of surveying. where you get a lot more value for your survey. You get a lot more work done where you can do what we call scanning and measurement surveys at the same time. You're not just doing surveillance. You can actually go back and do spot measurements as well, and that allows you to only deploy once rather than deploying twice, once for scanning and once for direct measurements. They all have high impact to our customers, and they all have what I would call reasonable capital demands comparable to the rest of our fleet.

Thanks for all that. Your next question comes from the line of David Smith with Hyken Energy.

Hey, thank you, and good morning. Morning, David. Let's open the touch on the ad tech guidance real quick. Similar margins sequentially, really strong margins. Full year margin guidance looks, if I understood right, flat year over year. Am I mistaken, that implies a step down of the margin rate in the second half of 21? There is some of that.

Yeah, there is some of that, and Alan might jump in here too, but it's a lot due to mix. We picked up some of the big, like the big sub-rescue contract. Short of a mobilization, which, you know, we don't hope for mobilizations of a sub-rescue, but short of a mobilization, that is a bulky business with lower margins, so that mix change does affect ad tech as well. Alan, would you add anything to that? Yes, please.

Yeah, I think the other components you said in the mix change, you know, with the human lander system, you know, that we benefited from last year tends to be value engineering type work that was going through first quarter of this year. So with the Dynetics team not being successful, or at least they are appealing it, I think, along with Blue Origin. But the expectation is that's not going to materialize in the second half. Okay. we had hoped, one stage.

Sure. That all makes perfect sense. Is it reasonable to think about the second half margin run rate as kind of a normalized level for the business? I think it's going to be kind of the more new normal, yes. Perfectly clear. Thank you very much.

At this time, there are no further questions. I will turn it back over to Rod Larson for closing remarks.

Thanks, Tabitha. Since there are no more questions, I'd just like to wrap up by thanking everybody for joining the call. This concludes our first quarter 2021 conference call. Have a great day.

Thank you, ladies and gentlemen. You may now disconnect.