Oceaneering International Inc Q1 FY2021 Earnings Call

My name is Pamela and I'll be your conference operator. I would like to welcome everyone to Oceaneering's first-quarter 2021 earnings conference call. With that, I will now turn the call over to Mark Peterson, Oceaneering's vice president of corporate development and investor relations.

Thank you, Pamela. 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 made 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 GAAP 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 ongoing COVID, confidence is returning to the markets as demonstrated by increasing demand. The developing demand recovery, combined with continued operational 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 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 $0.09 per share on revenue of $438 million. These results included the impact of $3.2 million 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 $0.03 per share. We've continued to improve our operating performance by driving operational efficiency, led by a focus 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, as 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 million 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 EBITDA margin of 32% was consistent with recent prior quarters as pricing remains 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 higher declined, as compared to the fourth quarter due to expected lower seasonal activity. Days on higher 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 the 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% in December 31st, 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 revenue. 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 business remains weak during the first quarter of 2021. Our manufactured products backlog at 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 year, 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 start-up of field activities on the riser 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. Gulf of Mexico or GOM activity during the first quarter was relatively flat with the fourth quarter of 2020 as higher amounts of installation work were offset by lower amounts of intervention, maintenance, and repair work. For integrity management and digital solutions or IMDS, first-quarter 2021 adjusted operating income was higher than the fourth quarter of 2020 on flat revenue. 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 transformation of how and where work is performed, which is driving more effective use of personnel. Our aerospace and defense technologies or ADTech 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 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 million 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 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, which is expected to continue through the second quarter. For IMDS, direct hire revenues are relatively flat, with operating results being consistent with the first quarter of 2021. For ADTech, 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, 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 following 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. And as of March 31st, 2021, there were approximately 14 Oceaneering ROVs onboard 13 floating drilling rigs with contract terms expiring before the 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 activities are 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 Riserless light well 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 ADTech, we expect higher revenue with operating results and 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 million and $70 million. This includes approximately $35 million to $40 million of maintenance capital expenditures, and $15 million to $30 million of growth capital expenditures. We forecast our 2021 income tax payments to be in the range of $40 million to $45 million. In addition, we expect to receive CARES Act tax refunds of $28 million 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 Oceaneering has done throughout 50-plus years, we will continue to adapt and lead. The past few years, we've 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 Freedom class robotic vehicles, and facility footprint optimization. Transforming the manner in how and where we work, focusing integrity management in digital solutions or IMDS on digital and software-enabled predictive analytical models, the addition of a recent Jones Act vessel outfitted with the most fuel-efficient engines. Additionally, we're leveraging all of these capabilities and 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 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' 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 million to $210 million. The general macro environment for 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 and 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. 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 J. 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. And 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 we'll now be happy to take any questions you might have.

The first question comes from the line of Mike Sabella, Bank of America.

Hey good morning everyone. So I was wondering maybe if you could just talk a little bit about the guide 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 why you did in 1Q and 2Q guide it looks like the bottom of the range 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 potentially bring you to the bottom under at the end of the range and kind of how we should be thinking about that?

Yes, I believe we are in a solid position, and while there are a few new developments, much of our story remains consistent. Regarding the operational status in the Gulf of Mexico, everything has been progressing well in terms of permits and work completion. However, we remain cautious, especially with the administration's involvement, ensuring that our customers can continue their operations. If this continues along with favorable commodity prices, we expect activity to remain strong. Although challenges exist, we are optimistic about maintaining robust activity levels. Additionally, we are evaluating our capacity for production at our plants. Our umbilical manufacturing generally has longer lead times, while our other divisions, like Greylock, have a quicker turnaround. Increased throughput in these areas could enhance our overall output. There's some risk associated with this approach, but we anticipate significant deliveries of manufactured products in the latter half of the year, provided our customers are prepared to receive them. While we have some operations lined up for the fourth quarter and a steady level of activity in the third quarter, this should give you a good insight into the uncertainties we face for the remainder of the year. I wouldn't say that the potential for positive outcomes is greater than the risks, but these are the factors at play.

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. So if we see the continued stability in that price, I think we would be looking more toward the upper end.

Got it. Understood. And then if we could just kind of switch gears and maybe just a longer-term question around, Subsea Robotics margins. We don't have a whole lot of history to go off of given the resegmentation last year. You all right now are kind of at or you were near, where do 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 work and margins get to in Subsea Robotics? What is more normal, it's kind of medium-term for that segment?

I believe that most of the potential upside won't come from a significant market-driven rebound with shortages causing price increases. Instead, I expect to see gradual improvements through technology. As we introduce more differentiated products like SRS and Freedom, along with increased survey work, those factors will significantly enhance our margins. However, it's unlikely that we'll see drastic changes like we did during periods of rig and ROV shortages. The focus should be on technological advancements, as that is what truly adds value for our customers, beyond just reduced manning and available vessel days. It's also crucial to consider the carbon aspect with Liberty and Freedom, which offers customers solutions that significantly lower their carbon footprint. Purchasing carbon credits for offsetting also holds genuine financial value. I anticipate these changes will unfold slowly and steadily, rather than through erratic market fluctuations.

Understood. Thanks, everyone.

Yes. Thanks Mike.

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

Thanks. Good morning Rod.

Good morning Ian.

I'll ask again about the potential conservatism in the guidance. In your base case, let's assume the world does not experience a setback. What other factors, apart from the LWI contract expiring in Q2, could negatively impact the second half compared to the first half? I'm not seeing any significant issues in the other segments. Perhaps a minor concern in products, but I would like to follow up on that. Rod?

Our performance over the last couple of years has been influenced by some extended seasonal work. Hurricane activity and other factors shifted some OPG work from the third quarter to the fourth quarter, resulting in a stronger second half with a longer season. This pattern has been somewhat unusual, and we haven't experienced it every year, so we are being cautious about the amount of activity we might see in the fourth quarter. That's a significant consideration when comparing year-over-year performance. We will have to wait and see if we benefit from this along with steady oil prices, which could also positively impact the second half of the year. However, we need to monitor how these factors develop, and we are being careful to choose the right moments for activity.

So really, really focused on OPG, is the biggest wildcard.

OPG and Subsea Robotics are influenced similarly due to the advantages they gain from weather and seasonality. Additionally, some of the work OPG does also impacts Subsea Robotics, particularly in the Gulf of Mexico.

Okay. Caught your press release recently on the jammed-through April orders and products of 135. I, either misheard or was confused by your comment in the prepared remarks on book-to-bill for products, both for this year. If I could ask for a repeat on that, sorry.

Yes. We guided to a 1.1 to 1.5 for the full-year book-to-bill.

Okay. So quite an acceleration there from trailing order rates.

If one thing you continue to see though in this, a lot of these awards are very lumpy. So if we continue to see our customers progress with their contracts, 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.

Okay. Thanks, Alan. Thanks, Rod. Got it.

Got it.

The next question is from the line of Taylor Zurcher, Pickering and Holt.

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 deep-water oriented segments, could you help us think about where you're seeing the most shots on goal? As we've progressed through 2021, it feels like Brazil is probably at the top, a bright spot right now and that's likely to continue. But are you seeing any source of green shoots activity in other regions around the world, like particularly, West Africa and even in the Gulf of Mexico from a deep-water activity perspective?

I would say yes. The Norwegian Continental Shelf has remained steady, which is a positive sign. Projects there show potential for growth. Brazil and Latin America, especially Northern and Southern regions like Guyana and Surinam, are looking very promising. The Gulf region has experienced strong energy reform, with positive developments in both Mexico and the United States. There are several projects underway in that area. West Africa is showing promise as well, and I would extend that to all of Africa; there are opportunities, though challenges exist that we need to consider. It's difficult to assert that overall conditions will be exceptionally strong, but other regions we discussed seem more favorable. For instance, the force majeure situation in Mozambique needs resolution, but that's not uncommon for that region. We’ll keep an eye on it, as resolving those issues could lead to positive outcomes.

Okay, that's helpful. My follow-up is regarding IMDS. I understand it's a smaller earnings contributor, but the margin progression with essentially flat revenues is great to see, and you've discussed building a pipeline of opportunities in that segment. I'm wondering if you could provide an update on what you're observing in that segment and discuss how you're transforming your work processes to ensure margins continue to improve moving forward.

Yes, thank you for the question. It's something we haven't discussed as much before. We're transitioning from primarily inspection work to focusing more on integrity management and predictive modeling. We've been working on providing remote access to our assets, which allows us to send data to be analyzed onshore. Instead of transporting personnel to the asset sites, we’re bringing the asset data to the people, which has significantly improved efficiency. Additionally, we are emphasizing the value proposition for our customers, enabling us to attract new clients and expand into different markets. I see a greater global presence as a growth opportunity, but the real advantage lies in advancing up the value chain from inspection to integrity management. We’ve mentioned utilizing technologies such as machine vision, machine learning, artificial intelligence, and predictive modeling; that's critical for our continued growth. We have the right team in place to drive this forward. Enhancing both technology and its application is key to improving margins and further expanding the business.

All right, good to hear. Thank you.

Yes. Thank you.

Your next question comes from the line of Blake Gendron of Wolfe Research.

Yes. Thanks. Just want to come back to the OPG segment. Some variability it sounds like, some upside potential, a nice handoff between Angola and the Isurus call-out work potentially here in the back half of the year. I'm just wondering, first on the profitability profile of those two things. We see Angola roll off and pick up. Is that going to meaningfully change segment margins? And then, seasonally or otherwise with the strength in commodity, what kind of follow-through to be potentially seen 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 transition. I don't see significant changes there. So it was a shift in margins, and I believe we need higher activity levels to achieve that. We need to optimize the utilization of our assets, as that is where the real progress occurs. We discussed getting the assets we currently have under contract fully allocated and then increasing our capacity with spot charters. This will play a key role in reaching the upper end of our OPG targets for the second half of the year. Looking further out, I cannot make a definite statement. The campaigns are often challenging to forecast; when they arrive, they're beneficial, but they tend to be sensitive to pricing and budgets. Therefore, I wouldn't commit to predicting them too many quarters in advance. Alan, do you have anything to add?

Yes. I would add one thing that 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 the well intervention project that we have that generates a lot of revenue here in the first half, but we also have the fill support services contract that we're executing that's predominately in the first half of the year and fills in the July timeframe. So you kind of look at the revenue step down in the back half; those are two pretty substantial projects that we're working on in the first half of the year that 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 greater 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 2024 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 saying in some of your non-energy businesses, where M&A could be a foremost capital allocation driver for you?

I think there are some opportunities. When considering them, they usually aren't major transformational efforts. Instead, they generally involve acquiring technology that we can utilize within our core competency, especially in Marine. These are the types of opportunities we would explore. Additionally, preserving optionality is a significant factor for us when discussing early debt repayment, managing our debt, and adjusting maturities, which all relate to our access to capital. Nevertheless, our primary focus remains on achieving a leverage ratio that satisfies investors and then establishing that as our new standard while we pursue growth opportunities.

Makes sense. I appreciate the time. Thanks.

Yes.

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

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

No, right now most of this is in our traditional businesses. 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 predominately 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 moving activity, Samantha, than it is any sort of opportunistic capture of price and 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 with your newer ROVs that you highlighted. I'm curious if those ROVs are working right now and what sort of cost 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-based subsea that they can leave the Liberty system without having a boat there to tend it if you will. And it can communicate via the buoy to the surface. It's got battery power; they continue to do work and do monitoring exercises, while other things are happening in the field and while they're doing production tests, or what have you. So that reduces the cost quite a bit by allowing them to not have the cost of that boat or the carbon footprint of having that boat there. That's an opportunity for us. The system, because of the handling system and various other factors, is largely compatible with almost all vehicles, except for Freedom. We use a significant number of spare parts and existing vehicles to construct these systems, which keeps the costs quite manageable; it doesn't require a large capital investment given the options available. This is positive news when it occurs. Taking the Isurus as an example, it includes many repurposed components, making it cost-effective for us to implement an Isurus system. This offers great benefits to our customers as they recognize its value, especially since it can operate at higher currents. Most of our clients are offshore wind installers, and we deliver these systems directly to vessel owners and installers, allowing them to achieve more operational days per year by using ROVs in tougher weather conditions. This significantly enhances their value; for instance, if a vessel typically operates only two days a year, being able to increase that to 250 days a year greatly improves utilization. We are examining various aspects of this. Liberty Freedom represents a significant advancement. It introduces a completely new approach, where we often leave a vehicle in place or utilize it for different types of surveys, enhancing the value of the survey. This method allows for increased productivity, enabling us to conduct what we refer to as adding and measurement surveys simultaneously. We are not limited to just surveillance; we can also perform spot measurements, which means we only need to deploy once instead of making separate deployments for scanning and direct measurements. All these factors have a substantial impact on our customers, and their capital requirements are reasonable compared to the rest of our fleet.

Thanks for all that.

Your next question comes from the line of David Smith, Heikkinen Energy.

Hey thank you and good morning.

Good morning, David.

I was hoping to touch on the ADTech guidance real quick. Similar margins sequentially, really strong margins. Full-year margin guidance look, if I am to say it right, flat year over year. Am I mistaken that implies a step down on the margin rate in the second half of '21? And there's also –

Yes, there is some of that and Alan might jump in here, too, but it's a lot to do to mix. When we picked up some of the big, like, the big sub rescue contract. Short of a mobilization which we don't hope for mobilization of a sub rescue, but sort of a mobilization that is a bulky business with lower margins. So that mix change does affect ADTech as well. Alan, would you be adding?

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

Sure. It all makes perfect sense. Is it reasonable to think about the second half margin run rate as kind of 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.

Okay.

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

Thanks, Pamela. 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.