Oceaneering International, Inc.

Welcome to Oceaneering's fourth quarter and full year 2024 earnings conference call. My name is Desiree 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. Please go ahead.

Thanks, Desiree. Good morning and welcome to Oceaneering's fourth quarter and full year 2024 earnings conference call. Today's call is being webcast and a replay will be available on Oceaneering's website. With me on the call today are 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 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 fourth 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. First off, thank you to our investors, our customers and vendors, partners, and most importantly, the Oceaneers around the globe for continuing to believe in and contribute to the Oceaneering story. During 2024, we recorded notable order intake of $2.9 billion, demonstrating our customers' confidence in our ability to deliver safe and reliable services and products. Repurchased approximately $20 million in shares. Demonstrated continued value for our customers as evidenced by our year-end remotely operated vehicle or ROV uptime rate of 99%. Further progressed pricing in our ROV business, improving 13% over the course of the year. Realized a 361 basis point improvement in subsea robotics or SSR EBITDA margin year-over-year, exiting 2024 at 36%. Attained our highest quarterly revenue since the fourth quarter of 2015 and surpassed $100 million in adjusted EBITDA for the first time since the second quarter of 2016. Won a contract from the Defense Innovation Unit to build a Freedom Vehicle, our hybrid RV, autonomous underwater vehicle, AUV, and to establish an onshore remote operations center for the U.S. Navy, highlighting the cross-industry applications for our technology. made targeted adjustments to our portfolio, including the fourth quarter acquisition of Global Design Innovation Limited, or GDI, a UK-based provider of digital and software solutions and exits from other businesses. And I would be remiss if I failed to mention our steadfast commitment to safety, which in 2024 led to a 56% reduction in high potential incidents and a total recordable incident rate, or TRIR, of 0.29 for the year. nearly matching our record low TRIR achieved in 2022. Now I will focus my comments on our performance for the fourth quarter and full year of 2024, our market outlook for 2025, our consolidated 2025 outlook, including our expectation to generate positive free cash flow in the range of $110 to $130 million, and EBIT on the range of $380 to $430 million, and our segment outlook for the full year and first quarter. of 2025. now starting with our fourth quarter 2024 results for the fourth quarter of 2024 we reported net income of 56.1 million dollars or 55 cents per share a 26 year-over-year increase consolidated revenue of 713 million dollars was nine percent higher than in the same period of the prior year with revenue increases in each of our operating segments Fourth quarter 2024 consolidated operating income of $77.9 million was 64% higher year over year due to significant improvements in our SSR and offshore project group or OPG segments. Our consolidated adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA of $102 million represented a 35% increase year over year and was slightly above both the midpoint of our implied guidance range provided at the beginning of the fourth quarter consensus estimates. Although we experienced typical fourth quarter seasonality in SSR, it's worth noting that their results declined only slightly while OPG's fourth quarter revenue, operating income, and EBITDA improved and represented its best quarter in 2024. We generated $128 million of cash from operating activities in the fourth quarter and invested approximately $34 million in organic capital expenditures including $18 million in growth and $16 million in maintenance. Additionally, as previously mentioned, we acquired GDI. We ended the quarter with free cash flow of $94.5 million. As of December 31st, 2024, our cash balance was $498 million. Now let's look at our business operations by segment for the fourth quarter of 2024 as compared to the fourth quarter of 2023. SSR operating income of $63.5 million was 26% higher compared to the fourth quarter of 2023 on a 6% increase in revenue. EBITDA margin also improved year-over-year to 36% from 32%, reflecting continued pricing progression in ROV and tooling and improved execution in our ROV and survey groups. Average ROV revenue per day utilized was $10,786, a 12% year-over-year increase, while fleet utilization of 66% and days utilized of 15,211 were slightly lower. ROV fleet use during the quarter of 64% in drill support and 36% in vessel-based activity was essentially the same as in the fourth quarter of 2023. The revenue split between our ROV business and our combined tooling and survey businesses as a percentage of our total SSR revenue was 77% and 23%. which was relatively flat during the same period in 2023. As of December 31st, 2024, we had 59% of the contracted floating rig market with ROV contracts on 84 of the 142 floating rigs under contract. We ended the quarter and the year just as we began with a fleet count of 250 ROV systems. Turning to manufactured products, our fourth quarter revenue of $143 million increased 8% year-over-year. Operating income of $4.2 million and operating income margin of 3% declined primarily due to a reserve taken on an umbilical project. Year-end 2024 backlog was $604 million, a decrease of $17 million compared to December 31, 2023. The book-to-bill ratio of 0.97 for the full year of 2024 compared to 1.31 in the full year of 2023, was lower than expected due to the timing of awards for max mover counterbalance forklifts. OPG achieved their highest levels of revenue, operating income, and operating income margin in 2024 during the fourth quarter. As compared to the fourth quarter of 2023, operating income improved significantly to $39.3 million, operating income margin improved to 21% from 9%, and revenue increased 14% to $184 million. These improvements resulted from increased installation and intervention activity levels in West Africa and the Gulf of Mexico. For Integrity Management and Digital Solutions, or IMDS, fourth quarter operating income decreased by $1.2 million and operating income margin declined from 5% to 3%, despite a $9.1 million increase in revenue, primarily due to costs associated with acquisitions and divestitures in the segment. As previously announced, we completed the acquisition of GDI, which will report future financial results through IMDS. Our Aerospace and Defense Technologies, or ADTEC, fourth quarter 2024 operating income declined $1.1 million and operating income margin declined to 10% on a $3.9 million increase in revenue as compared to the same period last year. Operating income declined primarily due to changes in project mix, with increased volume in our Marine Services Division, which is lower margin manpower business, offsetting lower volume in our Oceaneering Technologies, or OTEC, division, and the implementation of a discreet new ERP system for ad tech that supports our growth strategy to become a prime contractor to the U.S. government. Fourth quarter 2024 unallocated expenses of $41.1 million were in line with the guidance for the quarter. Now I'll turn my focus to our full year 2024 results compared to 2023. For 2024, consolidated revenue increased 10% to $2.7 billion from $2.4 billion in 2023, with each of our operating segments achieving revenue growth. Consolidated 2024 operating income of $246 million, improved by $64.9 million, or 36%, and adjusted EBITDA of $347 million, improved by $58.2 million, or 20% compared to 2023. EBITDA gains in our SSR, manufactured products, and OPG segments more than offset declines in our INDS and ad tech segments. As compared to 2023, cash flow from operations declined $6.7 million to $203 million due to increased networking capital related to the timing of revenues and increased cash taxes. We invested $107 million in organic capital expenditures, an increase from $101 million in 2023. As previously discussed, we also spent approximately $27 million in inorganic capital expenditures, which included the acquisition of GDI. For the full year of 2024, free cash flow was $96.1 million compared to $109 million in 2023. At year end, we had healthy liquidity with $498 million in cash and cash equivalents and an undrawn $250 million credit revolver. Now, turning to our 2025 market outlook. We believe that Oceaneering is well positioned to take advantage of market dynamics in 2025 and beyond. Research services continue to report that breakeven costs and carbon intensity in the offshore operations are lower compared to most other forms of hydrocarbon development. Near-term and long-term oil and gas prices continue to be supportive of a healthy market for the services and products that we provide. We also continue to see growth opportunities within our ad tech sector. Analyst and Research Services projections for key energy related metrics that we track indicate that 2025 activity will be flat or slightly positive. We expect that the 2025 forecasted average Brent crude oil price of approximately $75 per barrel will be supportive of stable levels of offshore operating and capital spending throughout the year. The Deepwater Final Investment Decision or FID forecast indicates a year-over-year increase in 2025. providing added support for our forecast. Tree awards and project sanctions are indicators of the two to five year horizon for activities such as installations, equipment orders, and offshore spending. Tree awards are forecasted to increase in 2025 with approximately 285 subsea trees expected to be awarded in 2025 as compared to 216 awards in 2024. Tree installations are forecasted to increase year over year, with approximately 350 installations forecasted for 2025, as compared to 330 installations in 2024. Drilling rig demand is expected to be flat in 2025. While we view these market indicators as supportive, changes in the geopolitical landscape, including changes in regulations and trade policies, may impact the markets we serve and our customers' planned activities. Like our peers, we are closely monitoring the announcements of new tariffs, both by the U.S. and other countries, which we currently do not expect to have a material impact on our energy services and products. We are also monitoring the impact of budgetary reviews in the U.S. on our government-related markets. At this time, we expect that the specific defense-related markets that we serve will remain relatively stable with continued growth for the foreseeable future. Now for our 2025 consolidated outlook for Oceaneering. Based on our year-end 2024 backlog, expected backlog conversion, anticipated 2025 order intake, and current market fundamentals, we are projecting our 2025 consolidated revenue to grow by mid to high single digits with increased revenue in each of our operating segments. Our expectations for growth and revenue are driven by our expectations for continued pricing progression and favorable year-over-year project mix. We also expect higher operating income and operating income margins in each of our operating segments. While we remain confident in our backlog and sales pipeline, we felt it was prudent to acknowledge the aforementioned geopolitical risks and their potential impact on the markets we participate in. As reported yesterday, we have adjusted our EBITDA guidance range for the year. We anticipate generating $380 to $430 million of EBITDA, with the year-over-year improvement being led by our SSR, ad tech, and manufactured product segments. At the midpoint of this range, our 2025 EBITDA would represent a 17% increase over our 2024 adjusted EBITDA. We anticipate generating positive free cash flow of $110 to $130 million. As has been the case over the past several years, we anticipate a substantial cash draw during the first quarter related to working capital changes associated with vendor payments and customer cash receipts and the payment of performance-based incentive compensation. For 2025, we forecast our organic capital expenditures to total between $130 and $140 million. This includes approximately $52 to $56 million of maintenance capital expenditures and $78 to $84 million of growth capital expenditures. This total is inclusive of $15 million to $20 million associated with the implementation of a new ERP system. It is worth noting that the increase in capital expenditures is tied to growth opportunities related to new contracts. We forecast our 2025 interest expense net of interest income to be in the range of $26 to $30 million. We expect our 2025 cash tax payments to be in the range of $110 to $120 million. This includes taxes incurred in countries that impose tax based on in-country revenue and bear no relationship to the profitability of such operations. Directionally, in 2025, for our operations by segment, for SSR, the expectation for improved results is based on sustained and continued pricing improvement in ROV, a stable overall demand for ROV days, and improved results from our survey business. Results for tooling-based services are expected to generally follow ROV days utilized, revenue growth is expected to be in the high single-digit range, and EBITDA margins are expected to average in the mid-30% range for the full year. For ROVs, we project that our 2024 service mix of 65% drill support and 35% vessel services will remain generally the same in 2025. We expect to continue to navigate concerns about white space and drilling schedules by maintaining and placing our ROV systems on higher class assets. Our overall ROV fleet utilization during the year is forecast to range between the high 60 and low 70% with high seasonal activity during the second and third quarters. We expect to sustain our ROV market share in the 55 to 60% range for drill support services. We continue to see opportunities to improve ROV revenue per day utilized. In 2024, we saw an increase of 13% year over year from $9,315 in 2023 to $10,481 in 2024 with a 2024 exit rate of $10,786. For manufactured products, we expect operating margins to improve and operating results to improve significantly on increased revenue primarily based on conversion of our existing backlog and energy products, growth in our Greylock connectors business, and improvements in our non-energy product lines. For OPG, operating results are forecasted to improve on a flat to slight increase in revenue. These projections are based on expectations for improved vessel utilization in the Gulf of Mexico and West Africa and increased activity levels in Brazil and Asia Pacific. overall for 2025 opg operating income margins are expected to average in the mid-teens range for the year primarily due to an increase in higher margin intervention work including light well intervention and a meaningful reduction in dry dock costs imds operating results are forecasted to improve significantly on increased revenue with growth opportunities in digital and engineering services operating income margin is expected to improve to improve to be in the high single-digit to low double-digit range for the year. AdTech operating results and revenue are expected to be significantly higher. We anticipate growth in all three of our government-focused businesses led by OTEC as we commence work on expected new program awards and recovery in our space systems business. Operating income margins are expected to average in the low teens of the year. For 2025, we anticipate unallocated expenses to average approximately $45 million per quarter. Now I'll discuss our outlook for the first quarter of 2025 as compared to the first quarter of 2024. On a consolidated basis, we expect our first quarter 2025 revenue to increase and EBITDA to significantly increase, with EBITDA in the range of $80 to $90 million. As compared to the first quarter of 2024, our expectations for the first quarter of 2025 by segment are. For SSR, we project revenue to increase and operating results to increase significantly. For OPG, we expect revenue and operating results to improve significantly due to ongoing work from the fourth quarter of 2024 and due to the reduction of dry dock costs and the related loss of vessel days that impacted the first quarter of 2024. For manufactured products, IMDS, and ad tech, we expect that revenue and operating results will be similar. We forecast unallocated expenses to be in the range of $45 million. In closing, I'd like to again thank our team of Oceaneers. It is their ingenuity, teamwork, and commitment to our shared values that drives our success. As we look forward to the future, we remain focused on delivering innovative solutions to our customers, fulfilling our commitments to our shareholders, and supporting and empowering our team. We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you may have.