Oceaneering International, Inc.

Welcome, everyone, to Oceaneering's second quarter 2024 earnings conference call. My name is Brittany, and I will be your conference operator. 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 Hilary Frisbee, Oceaneering's Senior Director of Investor Relations.

Thanks, Brittany. Good morning and welcome to Oceaneering's second quarter 2024 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website. Joining us on the call are Rob 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 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, and thanks for joining the call today. I'd like to begin by highlighting the continued strength that we're seeing in our energy-related business. Remotely operated vehicles, or ROV, average revenue per day utilized continues to increase, averaging $10,528 for the quarter, a key component in driving subsea robotics, or SSR, EBITDA margins into the mid-30% range. Consolidated bookings led by our energy business During the quarter exceeded $1 billion with manufactured products backlog ending the quarter at $713 million. Additionally, quotation activity is still strong across our energy and aerospace and defense technologies or ad tech businesses. Today I'll focus my comments on our performance for the second quarter of 2024 and our consolidated and business segment outlook for the third quarter and full year 2024. Now for our results. For the second quarter, we reported net income of $35 million, or 34 cents per share, on revenue of $669 million. Adjusted net income was $28.6 million, or 28 cents per share. These adjusted results included the impact of $1 million of foreign exchange gains and $5.5 million of expenses related to discrete tax adjustments. Our consolidated second quarter 2024 operating income as compared to the second quarter of 2023 was up 23% and revenue was up 12%. All of our business segments achieved revenue increases with improved operating income in our SSR and manufactured product segments. For the second quarter of 2024, our consolidated adjusted EBITDA of $85.9 million was in line with our guidance range and consensus estimate. Now let's look at our business operations by segment for the second quarter of 2024 as compared to the second quarter of 2023. SSR operating income was 46% higher on a 15% increase in revenue and an improved operating income margin as compared to the second quarter of 2023. EBITDA margin also improved over the same period last year to 34% from 30% largely due to improvements in ROV average revenue per day and continued cost control measures. Average ROV revenue per day utilized of $10,528 was 16% higher. Utilization was flat at 70% and days utilized were relatively flat at 15,839. ROV fleet use during the second quarter of 2024 was 64% in drill support and 36% in vessel-based activity compared to the 61% and 39%, respectively, in the same period of 2023. The revenue split between our ROE business and our combined tooling and survey businesses as a percentage of our total SSR revenue was 78% and 22%, respectively, which is the same split as in the second quarter of 2023. At the end of June, we had ROE contracts on 89 of the 148 floating rigs under contract, or 60%. Turning to manufactured products, compared to the second quarter of 2023, operating income improved to $14.4 million, an increase of 35% on a 12% increase in revenue. Our backlog on June 30, 2024 was $713 million, an increase of $295 million over the second quarter of 2023, which gives us increasing visibility into manufacturing activity levels for energy products into 2026 and 2027. Our book-to-bill ratio was 1.56 for the trailing 12 months. Our offshore projects group, or OPG, second quarter 2024 operating income and operating income margin declined as compared to the second quarter of 2023 due to the timing of pre-contract award costs that were expensed during the quarter, additional dry dock costs, and project mix. Integrity Management and Digital Solutions, or IMDS, second quarter 2024 operating income and operating income margin were slightly lower than the same quarter in the prior year on a 16% increase in revenue. AdTech's second quarter 2024 revenue increased by 4% as compared to the second quarter of 2023, while operating income decreased significantly to $7.2 million and operating income margin decreased to 7%. These decreases were due to a reserve related to a contractual dispute that was taken during the quarter and to lower than expected activity levels in our space systems business, predominantly related to the Extravehicular Activity Services, or XEVAS, spacesuit contract. Unallocated expenses of $39.7 million are in line with our guidance for the quarter. Now I will address our outlook for the third quarter of 2024 as compared to the second quarter of 2024. On a consolidated basis, we expect our third quarter 2024 results to continue to improve sequentially with adjusted EBITDA in the range of $95 to $105 million on a low to mid single-digit percentage increase in revenue. Our expectations for our third quarter 2024 operations by segment are, for SSR, we're projecting slightly higher activity levels across our ROV, tooling, and survey businesses with slightly higher segment operating profitability. ROV days utilized are expected to increase in both drill support and vessel-based activities, achieving utilization in the low 70% range. SSR EBITDA margin is forecast to be in the low to mid 30% range. For manufactured products, we anticipate revenue to increase in the low teens percentage range, with lower operating income and operating income margin. This projection is based on our expectation of receiving materials that will yield lower margin revenue. and ongoing costs associated with implementing our mobile robotics growth strategy. For OPG, we anticipate relatively flat revenue and significantly higher operating results. Operating income margin is expected to be in the mid-teens range for the third quarter of 2024. This expectation is based on performing work associated with the project scope that we recognized pre-contract costs on during the second quarter and a more favorable mix of projects focused on higher value-added services. For IMDS, we expect relatively flat revenue and operating profitability. For ad tech, we expect relatively flat revenue and significantly higher operating income with operating margin in the low teens range. This expectation is based on similar levels of business activities and the absence of reserves recognized in the second quarter. Unallocated expenses are expected to be in the mid $40 million range in the third quarter of 2024. On a consolidated basis, for the full year 2024, as compared to 2023, we expect our consolidated adjusted EBITDA to be in the range of $340 to $370 million. Our narrowed range is based on our expectation for continuing healthy activity levels in our offshore businesses, which we anticipate will be partially offset by lower results in ad tech. Net income is forecasted to be in the range of $130 to $150 million. Net interest expense is projected to be in the range of $25 to $28 million. Our other consolidated guidance for the year remains the same. Our estimated organic capital expenditure for 2024 remains between $110 and $130 million. This includes approximately $50 to $60 million of maintenance capital expenditures and $60 to $70 million of growth capital expenditures. We forecast our 2024 cash income tax payments to be in the range of $80 to $90 million, and unallocated expenses are expected to average $40 million per quarter for the remainder of 2024. Directionally, for our full year, 2024 operations by segment as compared to 2023. For SSR, we continue to forecast improved operating results on a low to mid-teens percentage increase in revenue. SSR EBITDA margins are expected to be in the mid-30% range in the second half of the year, leading to margins in the low to mid-30% range for the full year. For ROVs, we expect ROV days utilized and revenue per day utilized to increase year-over-year. Our 2023 service mix of 63% drill support and 37% vessel-based services is expected to remain relatively the same in 2024, with higher vessel-based utilization during the seasonally higher second and third quarters. We estimate overall RV fleet utilization to be in the high 60% to low 70% 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 55 to 60% range. For manufactured products, we project operating income to increase on a greater than 10% increase in revenue, with a slight improvement in margin. This expectation is based on our converting a portion of the $713 million in backlog and continuing strength in bidding activity in our energy businesses. We expect segment book to bill ratio will be in the range of 1.1 to 1.3 for the full year. For OPG, we continue to expect operating results to improve on a slight increase in revenue with flat international activity and increased utilization in the Gulf of Mexico. Overall for 2024, OPG operating income margin is expected to be in the low to mid-teens range for the year. For IMBS, operating income results are expected to be similar on increased revenue. We continue to project year-over-year operating income margin to remain in the mid-single-digit range for the year. For ad tech, revenue is projected to increase with lower operating income results and operating income margin. In summary, based on our solid first half performance and outlook for the remainder of the year, we are maintaining $355 million as the midpoint of our 2024 adjusted EBITDA guidance range, while narrowing the range to $340 million to $370 million. It is worth noting that at the midpoint of our $110 million to $150 million free cash flow guidance range, we expect to generate free cash flow of $195 million over the remainder of the year. And secondly, we remain encouraged and confident in the markets we serve, Our core energy markets continue to perform well, and though our ad tech group had a disappointing quarter due to the changes in the XEVAS program, the strength of their sales funnel, and in addition to their resilience and ability to find new opportunities, has me excited for the future of this business. We remain focused on our growth strategy in energy markets and increasing participation in longer-term non-energy growth markets. We appreciate everyone's continued interest in Oceaneering and BE. and I'll be happy to take any questions you may have.