Oceaneering International, Inc.

My name is Brian and I'll be your conference operator. Welcome everyone to Ocean Earrings second quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. There will be a question and answer period after the speaker's remarks. With that, I will now turn the call over to Mark Peterson, Ocean Earrings Vice President of Corporate Development and Investor Relations.

Thanks, Brian. Good morning and welcome to Oceaneering's second quarter 2023 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 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.

Hey, good morning, everybody, and thanks for joining the call today. I'd like to begin by emphasizing that our business activity is increasing and demonstrating quantifiable improvements from accelerating deepwater and non-energy market fundamentals. Here are a few supporting data points. On a consolidated basis, we produced operating income of $49.2 million in the second quarter of 2023. our highest quarterly operating income since 2015. For the first half of 2023, our energy segments generated an 18% increase in revenue and nearly a 100% increase in operating income as compared with the first half of 2022. Our near-term rolling sales funnel at 6-30-2023 was more than 35% greater than at the same time last year. And inbound orders year to date 2023 versus 2022 are up over 20%. We expect strong offshore market dynamics to continue for the foreseeable future, with robust bidding activity supporting our expectation for growing backlog and increasing activity in our energy segments. Market dynamics are also favorable for our aerospace and defense technology segment, or ADTEC, and autonomous mobile robotics business, or AMR. Based on our year-to-date results, and our current expectations for the second half of 2023, we are narrowing our adjusted EBITDA guidance by raising the lower bound of the previous range and adjusting the range higher for our projected free cash flow. We now expect to generate between $275 and $310 million of adjusted EBITDA and $90 to $130 million of free cash flow for the full year. Now I'll focus my comments on our performance for the second quarter of 2023, our current market outlook, Oceaneering's consolidated and business segment outlook for the third quarter of 2023, and Oceaneering's revised consolidated 2023 outlook, including revised adjusted EBITDA and free cash flow guidance ranges. After these comments, I'll then make some closing remarks before opening the call to your questions. Now, to our second quarter summary results. Our second quarter 2023 results increased significantly compared to the first quarter of 2023, as we generated adjusted EBITDA of $74.8 million. This result was slightly outside the bottom end of our guidance range provided at the beginning of the quarter, primarily due to negative impacts from higher project costs in our entertainment business and the delay of project starts in our offshore project segment, or OPG. During the second quarter of 2023, all of our operating segments generated higher revenue and, with the exception of our manufactured product segment, Each of our operating segments reported operating income growth, led by increases in our OPG and subsea robotics or SSR segments. Operating results benefited from seasonal and market influences that resulted in an 11% sequential growth in consolidated revenue. Compared to the first quarter of 2023, our energy segments in aggregate, led by OPG and SSR, posted a 13% revenue increase and significantly improved operating results in the second quarter of 2023. Our non-energy segment, ADTECH, also produced significantly improved operating income as compared to the first quarter of 2023. Consolidated operating income increased by $22.4 million in the second quarter of 2023, an 84% increase as compared to the first quarter of 2023. with all of our operating segments generating positive operating income and positive EBITDA. Now let's look at our business operations by segment for the second quarter of 2023. SSR revenue increased over 10% and operating income increased significantly as expected, with healthy demand for ROV and tooling services being slightly offset by some project delays and related vessel preparation costs in our survey business. SSR EBITDA margin of 30% improved slightly as compared to the first quarter of 2023. The SSR revenue split was 78% from our remotely operated vehicle or ROV business and 22% from our combined tooling and survey businesses compared to the 77-23 split, respectively, in the immediate prior quarter. As expected, ROVDAs on hire were sequentially higher by 13% with 16,032 in the second quarter as compared to 14,228 during the first quarter of 2023. There were increases for both drill support and vessel-based services. Our fleet use was 61% in drill support and 39% in vessel-based services versus 65% and 35% respectively in the first quarter. We maintained our fleet count at 250 ROV systems and our second quarter fleet utilization was 70%, up from 63% in the first quarter. This is the first quarter since our ROV fleet was reduced to 250 systems at the end of 2019, where utilization is average at or above 70%. Average ROV revenue per day on hire of $9,077 for the quarter was 1% lower than the first quarter of 2023. The decline in average ROV revenue per day on hire was primarily due to increased equipment standby rates, which do not include crewing charges. I should emphasize the increasing amount of standby revenue reflects improving contract terms related to the idle time that were virtually non-existent in recent years. This is accretive to revenue and does not diminish our forecast for improving average revenue per day in 2023. At the end of June, we had ROV contracts on 91 of the 147 floating rigs under contract, or 62% market share, an improvement over the 61% recorded for the quarter ending March 31, 2023. Turning to manufactured products, this segment generated second quarter 2023 operating income of $10.6 million on an 11% sequential increase in revenue. Revenue increased primarily due to the receipt of certain umbilical materials that did not contribute to current quarter operating results. Operating results declined modestly as compared to the first quarter of 2023, with project losses in our entertainment business offsetting consistent positive energy-related manufacturing performance. Our manufactured products backlog on June 30, 2023 declined to $418 million compared to our March 31, 2023 backlog of $446 million. Bidding activity remained strong in our energy and AMR businesses. Our book-to-bill ratio was 0.79 for the six months ended June 30, 2023 and 1.19 for the trailing 12 months and is expected to be in the range of 1.2 to 1.4 for the full year of 2023. For OPG, second quarter 2023 revenue and operating income increased significantly compared to the first quarter of 2023, primarily due to greater activity and utilization across all geographic regions and partially offset by certain planned installation work in the Gulf of Mexico shifting into the third quarter of 2023. Operating income margin improved to 13% in the second quarter of 2023 from 5% in the first quarter of 2023 as a result of higher overall utilization driven by seasonal demand. Integrity Management and Digital Solutions, or IMDS, second quarter 2023 operating income was higher on a 5% increase in revenue as compared to the previous quarter. An increase in scope on several international projects contributed to the revenue increase. Operating income margin of 6% improved slightly from 5% recorded in the first quarter of 2023. Our ad tech second quarter 2023 operating income increased as compared to the first quarter of 2023 on a 3% increase in revenue. Operating income margin of 12% increased as expected from the 9% margin achieved in the first quarter of 2023. Unallocated expenses of $36 million remained relatively flat compared to the first quarter of 2023. Now I'll address our outlook for the third quarter of 2023. On a consolidated basis, we expect a sequential increase in third quarter 2023 results on a high single-digit percentage increase in revenue. Our operating segments are expected to post a low to mid-teens percentage increase on adjusted EBITDA results as compared to the second quarter of 2023. However, based on our improved full-year 2023 performance outlook, third quarter 2023 unallocated expenses are forecast to increase to the mid $40 million range as we anticipate higher accruals as performance-based incentive compensation to be booked during the quarter. As a result, consolidated adjusted EBITDA is expected to be in the range of $75 to $85 million for the third quarter of 2023. For the third quarter of 2023, operations by segment as compared to the second quarter of 2023, for SSR, we are projecting higher revenue and operating profitability in our ROV, survey, and tooling businesses, with ROV utilization remaining in the high 60 to low 70% range on continuing robust offshore activity. SSR EBITDA margin is anticipated to improve as compared to the second quarter of 2023, with margins remaining in the low 30% range. We continue to see a trend of improving contract terms and pricing in our ROV business. For manufactured products, we anticipate lower operating income on a mid-teens percentage increase in revenue. We expect operating income margin to decrease slightly due to project mix changes and to be in the mid-single-digit range. For OPG, we expect a low teens percentage increase in revenue and higher operating income with operating margins in the mid-teens range. activity levels remain high, increasing slightly in international work and remaining stable in the Gulf of Mexico. For IMDS, we expect revenue to be relatively flat with operating income margin remaining in the mid-single-digit range. For ad tech, we forecast improved operating income and operating income margin on a modest increase in revenue. Directionally, for our full-year 2023 operations by segment, as compared to 2022, For SSR, we expect operating income to improve significantly on high teens percentage increase in revenue. ROV days on hire are projected to increase year over year with minor shifts in geographic mix. Results for tooling based services are expected to increase with activity levels generally following ROV days on hire. Survey results are also expected to improve on growing geophysical activity, primarily in the back half of 2023. SSR forecasted EBITDA margin is expected to show an increasing trend through the second half of the year, averaging in the low 30% range for the full year. For ROVs, we expect our 2023 service mix to remain about the same as 2022 mix of 61% drill support and 39% vessel-based services 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 60% range for the year, again with higher seasonal activity during the second and third quarters. Subject to quarterly variances, we continue to forecast that our market share for the drill support market will remain in the 55 to 60% range for the foreseeable future. As of June 30, 2023, there were approximately 23 oceanic ROVs on board 21 floating drilling rigs with contracts expiring at or before year-end 2023. During the second half of 2023, we expect 46 of our ROVs on 38 floating rigs to begin new contracts lasting beyond year-end. For manufactured products, we forecast a significant increase in revenue and operating income results as compared to 2022. Although we expect lower operating income margin during the second half of the year as a result of changes in project mix, We continue to expect operating margin for the full year to improve over 2022, averaging the mid-single-digit range for the year. Bidding activity in our energy and AMR businesses remains robust, with high levels of quotation activity expected to continue into 2024. We continue to expect our full-year 2023 book-to-bill ratio to be in the range of 1.2 to 1.4. For OPG, we expect slightly higher revenue, significantly higher operating income results, and improved operating income margin to the low to mid-teens range, driven by more efficient vessel utilization and increased international activity. Given our expectation for continuing high vessel demand for the foreseeable future, we acted during the second quarter of 2023 to secure chartered vessel capacity for multiple years. I want to deviate from my full year comments for a moment to talk in a bit more detail about our fourth quarter expectations for OPG. Based on our most recent forecast, we now have visibility into increased levels of international activity and expect operators to remain active in the Gulf of Mexico, moderating the familiar seasonal decline typically seen in the fourth quarter. We expect the higher demand levels to support pricing with operating incomes in the mid to high teens for the fourth quarter of 2023. For IMDS, we forecast relatively flat operating income results on modestly higher revenue with operating income margin remaining in the mid single digit range for the year. For ad tech, we expect higher operating income results on increased revenue with 2023 operating income margin in the low teens percentage range. We remain excited about our ad tech businesses position in the defense and government markets and see good growth potential for this segment again in 2024. On a consolidated basis, our estimated organic capital expenditures total for 2023 remains the same, between $90 and $110 million. This includes approximately $45 to $50 million of maintenance capital expenditures and $45 to $60 million of growth capital expenditures. We forecast our 2023 cash income tax payments to be in the range of $65 to $70 million, Net interest expense is projected to be approximately $20 million in 2023 as we continue to benefit from investing our cash at higher interest rates, and unallocated expenses are expected to average in the high $30 million range for the fourth quarter of 2023. Now, turning to our balance sheet and liquidity. Our cash balance at quarter end was relatively unchanged from the prior quarter at $504 million. During the quarter, we received a CARES Act tax refund of $22.7 million, which was offset by increased working capital usage. We are increasing our guidance range for free cash flow generation to $90 to $130 million for the full year. This guidance change reflects the inclusion of the CARES Act tax refund, which is partially offset by a higher amount of working capital required as a result of our improved outlook for the fourth quarter of 2023. We expect meaningful free cash generation during the second half of 2023, which is consistent with the last several years. Liquidity remains strong with no borrowings under our senior secured revolving credit facility and no loan maturities until November 2024. With significant levels of free cash flow expected to be generated again in 2023, We remain well positioned to address our 2024 debt maturity while also funding strategic growth initiatives in energy and non-energy markets. In summary, based on our first half performance, current backlog, and our prospects for the remainder of the year, we are narrowing our adjusted EBITDA guidance for full year 2023 by raising the lower bound of the previous range and now expect to generate between $275 and $310 million of adjusted EBITDA. Beyond 2023, we believe the supportive macro indicators associated with our energy businesses remain in place, and we anticipate higher levels of offshore energy activity for the foreseeable future. This, combined with good growth opportunities in our ad tech and mobility solutions businesses, underpins our expectation for continuing improvement in our financial performance. We remain confident in our ability to transform Oceaneering as the energy transition continues to evolve. This confidence is underpinned by our industrial knowledge and technology development in renewable energy and nonenergy markets. Our key focus areas continue to be remaining dedicated to the safety and well-being of our employees and customers, generating substantial positive free cash flow, providing innovative and value-added solutions to our customers, generating efficiencies through increased asset utilization and expanding operating margins, and remaining focused on ESG principles for the benefit of our employees, our customers, our shareholders, and our communities. We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you may have.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw your request, please press the star followed by the number two. One moment, please, for your first question.

First question comes from Eddie Kim with Barclays.

Please go ahead.

Hi, good morning. So you called out 2 items that negatively impacted results during the quarter, the project delays and. And then higher project costs in the entertainment business based on your prepared remarks. It sounds like the project delay is really just timing related and shifting from from 2 to 3 queue. But. Could you expand a bit on the project losses in the entertainment business? Was this more of a one-off situation, or is this something you expect could linger for the next couple quarters?

No, it's directly related to one single project. So it's something that we feel like doesn't have overhang into the rest of the year.

Okay. Okay, got it. Thanks for clarifying that. And then just wanted to Just years and asked about your expectations for orders in the manufactured products. Segment in the 2nd, half of the year you did around 0.8 times book to build in the 1st, half. The maintained a 4 year book, the bill guide of 1.2 to 1.4 times on our math that would require. it looks like a near doubling of your order imbalance in the second half just to meet the low end of that guide. So first, did I get that right? And if so, could you talk about the confidence level you have in the big step up in second half orders coming through?

Yeah, Eddie, this is Alan. You know, one of the things we look at is in that side of the business, there tends to be, you know, larger scale kind of episodic awards from time to time. And that's what we're seeing is we have several, uh, visibility in the several awards here in the back half a year that will move the needle for us. So it was a timing kind of matter with the customer FIDs needing to be achieved and then when they will actually place the order. So we do feel good about it. We do have a pretty strong pipeline of projects and bids outstanding that we think will support that.

Okay. Okay, great. Thank you very much for all the comments. I'll turn it back.

Thanks, Eddie. The next question comes from Kurt Halyard with Benchmark. Please go ahead.

Hey, good morning, everybody. Good afternoon, I guess. Popping up on it. Yeah, exactly. So I just want to make sure I kind of get some understanding of dynamics, right? So in terms of your ROV business, right, it tends to track what happens in both deep water drilling and to a certain extent you know, in subsea infrastructure. And, you know, we've seen a flurry of recent contract announcements by offshore drillers in terms of, you know, rising day rates and extension or longer duration of contracts. So just kind of curious, right, when you look back on cycle periods, you know, last time day rates were at these levels, you know, ROV rates were well north of, you know, $11,000 a day, which would confer another 20-plus percent upside from here. Is there any reason to think that the linkage between offshore rig rates and ROV rates has changed?

No, I think we're spot on. And, you know, the numbers are thrown out. Leading edge prices are good. It takes a while to run that through all our contracts. I know we've talked about that before. We really appreciated it when rates were dropping, right, that we had this duration of contracts and it kept us healthy, you know, for a longer period of time. same way coming back in. It just takes a little while to get it all the way up there, but we don't see any headwinds in track in the same way. We talked a little bit about the day rates currently and a little bit of change this quarter. Really, in some ways, it's good news because we're getting more days in the sense that our contracts are improving. We didn't get paid standby during the downturn. Now we're getting paid standby. While it increases the overall revenue, it also increases the denominator. It adds some days that didn't even exist before. So it looks a little dilutive to the revenue per day, but it's still adding revenue and it's still adding days. So it's good stuff.

Yeah, it's a better contract term. Gotcha. So in the other dynamic, right, is beyond just the day rate element is contract duration, right? So like with any other company, you know, whether it's a, doesn't matter what subsector it's in, you got some white space, you're going to have some, know some cost absorption issues right so looks like you're getting some you know instead of uh you know rigs being contracted you know nine to twelve months it looks like we're getting a series of rigs that are going to be you know three three years if not more so last time i checked you can't run a rig without an rov and as long as your contract duration extends can you help us understand how that helps your margin it definitely helps the margin because if you're getting those longer durations plus you're getting standbys you know we talked a lot about churn

In tougher years where, you know, the time between contracts, the time between even wells, we weren't getting paid. When we get into some of these longer-term contracts, you get paid either a day rate or a standby rate every day. And so all of that, again, back to contract terms, both the standby time and the longer durations all add up to better numbers, better margins for ROV.

All right. And then coming back to the prior question about manufacturing products, right? It looks like you got to have an acceleration, you know, in orders in the back half of the year. You know, we've had, you know, other companies that participate in subsea like FTI talk about, you know, significant order bookings out through 2025 and, you know, increasing visibility out beyond that. You guys, the biggest business in manufacturing products, if I'm not mistaken, is umbilicals, which kind of ties into subsea, you know, infrastructure. So I was wondering if you look at the dynamics right now, the backlog coming in, how do you feel about the margins and backlog that you're going to book from this point forward? And what does that mean for margin improvement going out into next year?

Yeah, Curt, if you look at how we are viewing that today, certainly the contracts we're bidding at current are better margins than what we bid last year. We are seeing, you know, improvement in pricing currently that would start to impact, as you indicated, kind of the back half of 24 and more into 25 even, and some of them are going into 26. So we are starting to see a, this is that long cycle business that we have that benefits from these contracts. I mean, long lead materials that we're ordering are 12 months out on some of these contracts. So we don't start to take revenue recognition on these until you know, we get all the parts in for the most part and can start to assemble the umbilical. So visibility is increasing in the longer term, late 24, 25. You know, part of what we have looking at from the margin progression you described is we've talked about, you know, one storage contract right now that we're working through with the customer this year that's, you know, certainly a higher margin perspective that will be rolling off. and we'll get back to more of a traditional manufacturing margin next year.

Just one more thing on manufactured products is, you know, where we talk about bookings going way out into the out years for umbilical plants being loaded, some of our higher margin businesses, you know, Greylock and Rotator and some of that work, we've got some capacity left. And so just increased subsea activity allows us to,

sweat those assets you know load those plants up and and do more work at that higher margin too which which bodes well for for the overall performance of the group so yeah i mean do you have line of sight to double digit margins in this business given given the you know you know stuff that's coming through backlog i i think we certainly have line of sight to the the double digit margins in fact if you look at q1 we were you know low double digits there uh when we look at Some of the non-traditional things we do with mobility solutions, specifically with the mobile robots that we're working on, they're actually margin diluted today. We are investing some money there to build that baseline business. We have good traction with some customers right now. But we are building the first units. So you would expect first units are going to cost a little bit more. uh so we do look to get some efficiency gains through some operational excellence programs getting more volume and those will help the overall margin as well and you know as we move forward but it is a little bit of it is a little bit of a drag right now as we invest but the good part is the pipeline looks great and so we expect we'll be able to get the benefit of that investment okay what is the total total addressable market you know you book those um automated forklifts

in the first quarter of this year, I believe, your initial order. So what do you think the total addressable market is for that business in particular?

Just on that forklift market, it's probably in the $3 billion range. We look at some of the market and market research kind of things that are out there. So it's a very large market that is growing at the same time. We're very interested in how we can continue to apply technologies that we already are very good at with ROVs and other robotic applications into this market space.

Great. Great. Thanks. I'll turn it over. Appreciate those answers. Thank you.

Thanks, Curt.

Our next question comes from David Smith with Pickering Energy Partners. Good morning.

Most of my questions have been asked, but I would like to circle back to your comments and the prepared remarks about securing charter vessel capacity for multiple years. I was wondering if you could give any color on the number of vessels, maybe the type of duration, or if there's any geographical concentration, and really wondering is this a reaction to shrinking spot market availability Or do any of these charters maybe line up with potential project opportunities that might have some real duration?

Yeah, and it's a moving number, but let's just say it's three plus. And some of that is for Gulf of Mexico spot market, to your point, because we need to make sure we've got availability. But others are targeted towards specific international opportunities. We've got international opportunities right now that we've been awarded in Guyana, in the Black Sea, in West Africa, things that we're working on for the Caspians. So the international market looks really strong for us, but we need to lock in some of that capacity because the spot market overseas is a little more challenging because you don't know if the boat's going to be where you need it when you need it. So we've had to make some commitments there as well.

Makes perfect sense. Thank you.

That's all I got.

There are no further questions at this time. I'll now turn the call over to Mark.

All right. Well, since there are no more questions, I just want to thank everybody for joining the call. And this concludes our second quarter 2023 conference call. Have a great day.

This concludes today's conference call. We thank you for participating and ask that you please disconnect your line.