Oceaneering International Inc Q2 FY2021 Earnings Call

Good morning. My name is Julie and I will be your conference operator. I would like to welcome everyone to Oceaneering's Second Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. With that, I will now turn the call over to Mr. Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations. You may begin.

Thank you, Julie. Good morning and welcome to Oceaneering's second 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 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.

Thanks, Mark. Good morning everybody and thanks for joining the call today. We're pleased to be sharing our positive net income results and solid financial performance for the second quarter of 2021. These results reflect a marked sequential increase in activity as four out of five of our operating segments delivered a revenue increase on average of more than 19%. As announced yesterday, we are raising our EBITDA guidance range to $200 million to $225 million for 2021. To avoid any doubt or confusion, we are not changing our free cash flow guidance. The confidence in increasing our guidance range stems from our strong first half 2021 financial performance, the increase in energy demand as a result of the rising number of COVID vaccinations allowing for an easing of restrictions, the OPEC Plus production discipline yielding supportive commodity prices, and the positive trend in the global economic recovery. Confidence is returning to the energy services industry, especially for those companies that can help their customers with carbon reduction goals. This combined with an expected rebound in our mobility solutions businesses and continued growth in our government businesses underpins our general expectation for increased activity levels over the next several years. Now, I'll focus my comments on our performance for the second quarter of 2021, our current market outlook, Oceaneering's consolidated and business segment outlook for the third quarter of 2021, and Oceaneering's improved consolidated 2021 outlook including a higher adjusted EBITDA guidance range, continued expectation to generate free cash flow in excess of 2020, and reducing our net debt position. After these comments, I will then make some closing remarks before opening the call to your questions. Now, for our second quarter summary results. We were very pleased with our adjusted operating results. For the quarter, we generated adjusted earnings before interest taxes depreciation and amortization, or adjusted EBITDA, of $60.6 million exceeding consensus estimates. During the second quarter, we generated $50.5 million in cash from operating activities and used $12.6 million for maintenance and growth in capital expenditures, resulting in free cash flow generation of $37.9 million. Additionally, during the quarter, we retired $30.5 million of our 2024 senior notes through open market repurchases. In total, our cash position increased by $13.3 million resulting in a cash balance of $456 million at the end of the second quarter. Liquidity remains strong with no borrowings against our $500 million revolving credit facility and no loan maturities until November of 2024. The positive operating results were attributable to a seasonally influenced 14% sequential growth in revenue complemented by continued operating discipline and incremental efficiency gains. As expected compared to the first quarter of 2021, our energy segments in aggregate posted double-digit revenue growth and improved adjusted operating results in the second quarter. Our aerospace and defense technologies or AdTech segment delivered sequential growth and solid adjusted operating results. Sequentially, consolidated adjusted operating results increased by $9.1 million with all of our operating segments generating positive adjusted operating results and EBITDA. Now, let's look at our business operations by segment for the second quarter of 2021. Subsea Robotics or SSR adjusted operating income improved on nearly 20% higher revenue. Our SSR quarterly adjusted EBITDA margin of 31% was consistent with recent quarters as pricing remains stable. Operating activity in our SSR segment resulted in sequentially higher ROV days and related tooling activity and higher survey activity. The SSR revenue split was 80% from our remotely operated vehicles or ROV business and 20% from our combined tooling and survey businesses compared to the 78/22 split, respectively in the immediate prior quarter. As we forecast, sequential ROV days on hire increased on standard seasonality and recovering offshore activity. With an increase in days for both drill support and vessel-based services, days on hire were 14,005 as compared to 11,887 during the first quarter. Our fleet use was 58% in drill support and 42% in vessel-based services versus 64% and 36% respectively in the first quarter. We maintained our fleet count at 250 ROV systems and our second quarter fleet utilization was 62%, up significantly from 53% in the first quarter. During the second quarter, we retired five of our conventional world-class ROV systems and replaced them with three upgraded conventional world-class systems and two Isurus world-class ROV systems that are currently engaged in renewables work. Average ROV revenue per day on hire of $8,056 was 2% higher than average ROV revenue per day on hire of $7,874 achieved during the first quarter. At the end of June, we had ROV contracts on 73 of the 126 floating rigs under contract or 58% market share, which was flat with the quarter ending March 31, 2021 when we had ROV contracts on 78 of the 135 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. Sequentially our second quarter 2021 adjusted operating income lined on lower segment revenue. Adjusted operating income margin decreased to 1% in the second quarter from 4% in the first quarter of 2021 as lower revenue decreased the ability to leverage our cost base. Activity in our Mobility Solutions or non-energy business remained muted during the second quarter of 2021. Our manufactured products backlog on June 30, 2021 was $315 million, improving on our first quarter backlog of $248 million. Our book-to-bill ratio was 1.3 for the six months ended June 30, 2021 and was 0.8 for the trailing 12 months. Offshore Projects Group or OPG's second quarter 2021 adjusted operating income declined as compared to the first quarter of 2021, despite a meaningful increase in revenue. Revenue benefited from ongoing field activities in several projects in Angola and a seasonal increase in intervention maintenance and repair or IMR work in the Gulf of Mexico. The sequential decline in adjusted operating income margin from 10% in the first quarter of 2021 to 7% in the second quarter of 2021 was primarily due to unplanned downtime and related costs associated with the Angola riserless light well intervention project, which was partially offset by higher IMR activities in the Gulf of Mexico. Integrity Management and Digital Solutions or IMDS, sequential adjusted operating income was higher on a 19% increase in revenue. Higher seasonal activity and the start-up of several new multiyear projects contributed to the revenue increase, and continued efficiency improvements including utilization of field personnel resulted in adjusted operating income margin increasing to 7% in the second quarter of 2021 from 5% in the first quarter of 2021. Our AdTech second quarter 2021 adjusted operating income improved from the first quarter of 2021 on a 20% increase in revenue. Adjusted operating income margin of 18% was better than forecast due to project mix and favorable rate base adjustments. Adjusted unallocated expenses of $30.3 million were slightly lower sequentially due to lower expense accruals related to incentive-based compensation forfeitures. Now I'll address our outlook for the third quarter of 2021. We are projecting a decline in our consolidated adjusted operating results on moderately lower revenues with adjusted EBITDA in the range of $50 million to $55 million. We expect commodity prices to support good activity levels in our energy segments, particularly for short-cycle work. For the third quarter of 2021, as compared to the second quarter, we expect relatively flat adjusted operating profitability in our energy segments to be more than offset by lower AdTech adjusted operating results and higher unallocated expenses. For our third quarter 2021 operations by segment as compared to the second quarter of 2021 for SSR we are projecting relatively flat activity and adjusted operating profitability in our ROV, survey, and tooling businesses with similar ROV utilization as compared to the second quarter. SSR adjusted EBITDA margin is anticipated to remain consistent with the prior several quarters. For manufactured products, we anticipate relatively flat revenue and adjusted operating profitability. Board activity continues to look encouraging in our energy products businesses. However, activity continues to lag in our Mobility Solutions businesses. For OPG, we forecast lower revenue and relatively flat adjusted operating results. We expect the Gulf of Mexico IMR activity to remain at a relatively high seasonal level through the third quarter. The riserless light well intervention project and field support contract in Angola are expected to continue for a portion of the third quarter. Our expectations for relatively flat adjusted operating results take into account the above-described levels of activity and improved uptime compared to the second quarter. For IMDS, we expect both revenue and adjusted operating results to remain relatively consistent with the second quarter of 2021. For AdTech, we forecast lower revenue and lower adjusted operating results, due to a change in project mix compared to the second quarter. Unallocated expenses are expected to be in the mid-$30 million range, due primarily to increased information technology infrastructure costs and normalized accruals for incentive-based compensation. Directionally for our full year 2021 operations by segment as compared to 2020, for SSR we expect adjusted operating results to improve on slightly higher revenue. ROV days on hire are projected to remain relatively flat year-over-year with minor shifts in geographic mix. Results for tooling-based services are expected to be flat with activity level generally following ROV days on hire. Survey results are expected to improve on growing international activity. SSR forecasted adjusted EBITDA margin is expected to remain relatively consistent with what we achieved in 2020. For ROVs we expect our 2021 service mix to remain about the same as the 2020 mix of 62% drill support and 38% 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 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 around 60% for the foreseeable future. As of June 30, 2021, there were approximately 28 Oceaneering ROVs on board 37 drilling rigs with contract terms expiring by year-end. During the same period, we expect 33 of our ROVs on 40 floating rigs to begin new contracts. For manufactured products, we forecast lower operating results due to the long cycle nature of this business and reduced customer capital commitments during 2020. Operating results in 2020 benefited from contracts awarded in 2019 that allowed for beneficial cost absorption through the year. In 2021 we expected the improved order intake seen during the first half of the year will drive increased activity in the fourth quarter. Our non-energy Mobility Solutions businesses continue to see reduced activity and order intake; however, confidence is building that we will see order intake improvement in 2022. We forecast that our operating income margins will be in the low to mid-single-digit range for the year, and the segment book-to-bill ratio will be in the range of 1.1 to 1.5 for the full year. OPG we forecast a meaningful annual improvement in adjusted operating results on higher revenue. Good vessel utilization is expected to continue through the third quarter with operators remaining active with IMR work in the Gulf of Mexico. However, we also expect a typical seasonal decline in activity during the fourth quarter. Our expectations for utilization are driven by the commodity pricing which remains supportive to short-cycle call-out work which is the majority of the work performed in this segment. Utilization of our vessels, both owned and chartered, has improved to the point that may lead us to entering the spot charters on an as-needed basis this year. For IMDS, we forecast improved operating results on higher revenue. We expect second half 2021 revenue to continue to benefit from incremental multiyear contracts that began during the first half of 2021. We forecast that our adjusted operating income margin will continue to improve through the end of 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 to improve adjusted operating results on increased revenue with an annual adjusted operating margin approximately the same as that achieved in 2020. We continue to see good growth opportunities in all three of our primary AdTech business lines: defense, subsea technologies, vessel modification and repair services, and space systems. 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. We continue to expect $28 million in CARES Act tax refunds. However, the timing of the receipt of these payments, whether in 2021 or 2022, is uncertain. Unallocated expenses are expected to average in the mid-$30 million range per quarter for the second half of 2021. Now turning to our balance sheet. Our net debt position improved during the second quarter as we repurchased $30.5 million of our 2024 senior notes and we're able to build our cash balance by $13.3 million. We had $456 million of cash and cash equivalents at the end of the second quarter. We continue to expect free cash flow generated in 2021 will be in excess of that generated in 2020. We are well positioned to address the maturity of our 2024 senior notes and will continue to be opportunistic and proactive regarding how and when we will address the remainder of this pending maturity. And as a reminder, we continue to have our $500 million undrawn revolver available to us until November of 2021 and $450 million available until January 2023. In summary, based on our first half financial performance and expectations for the second half of 2021 we are raising our adjusted EBITDA guidance to a range of $200 million to $225 million for the full year. This confidence despite ongoing uncertainties associated with COVID-19 stems from our strong first half 2021 performance, positive client interactions, support of oil price expectations, and growing backlog. As noted in my opening remarks, confidence is returning to the energy services industry, especially to those companies that can help their customers with carbon reduction goals. This combined with an expected rebound in our Mobility Solutions businesses and continued growth in our government businesses underpins our general expectation for increased activity levels over the next several years. Our focus continues to be on generating positive free cash flow in 2021, retaining and attracting top talent, addressing our 2024 debt maturity, maintaining financial flexibility, and growing our businesses by leveraging our technologies and capabilities into new markets. We appreciate everyone's continued interest in Oceaneering and we'll now be happy to take any questions you might have.

Your first question comes from Ian MacPherson.

Good morning, Rod. Thanks for all the color as always. Just like a high-level perspective visibility for deepwater activity going into 2022. And I know it's too microscopic to look at your seasonal ROV utilization. So you'll have more robotics activity seasonally in Q2 and Q3. But I would imagine that we have an uptrend and deepwater rig count visibility going into next year. Can you talk about tendering and what types of discussions you're having with operators regarding their needs for ROVs into next year just generally? And what flavor of growth we might consider at this point for the market broadly?

Yeah, it does feel good. I'll just say that. We can feel it. But there's no – it's not like somebody dropped the start flag, we’ll say that. It's a gradual increase. We don't – we can't necessarily see a huge spike in the number of floating drilling rigs. But I think the optimistic thing we see is that we're going through contract renewals. We're seeing longer contracts. Again, we're seeing people looking for the one and the two-year deals where we were going well-by-well in the past. So I would say that that's kind of the tone is that yes, it's optimistic. Yes, we see it going up, but it's going to be a ramp-up. It's not going to be any big spikes.

Okay. That makes sense for now, and it sounds like it's probably maybe biased to firm up from that as we go through the back half of the year. And then I think every earnings call for every company in the world this quarter is asked about how you're coping with inflation supply chain kind of once. I would think of that as being particularly relevant for ADTech but you seem to have a pretty sanguine outlook there. So I just want to talk about any potential storm put out there or how you're addressing those issues and the margin profile business structurally going forward?

Yeah. I think the steadiness of our contracts and the way that the ADTech work is contracted that's actually pretty well insulated from a lot of those changes, because it's been more predictable. I think where you're going to see it is as we start to contract new work, some of these new orders come in. Generally, we've been well, again, protected in the sense that we had back-to-backs with the large suppliers on the manufactured products and things like that. But I think you're going to continue to see, just like everybody else, who knows this whole 'great resignation?' We're going to see pressure on labor costs, people costs; that's going to be something that we have to watch and we have to signal to our customers early. But again, it's happening to everybody. So I don't think there's going to be a lot of pushback when they start to see those costs go up. The typical things we're just watching very carefully. Fuel and a lot of those things on the boats, most of that gets passed along as we go. So I don't see any big cliffs out there. But there is generally a rise, like you said, cost of almost everything is going up slightly. So it's just a matter of making sure that we signal early to the customers and we build it into the contracts.

That's great. Thanks, Rod. I’ll pass it over.

Thanks, Ian.

Hey, good morning, everyone.

Good morning, Mike.

So I don't think it's – I guess, maybe it's a little early to start thinking about 2022. You kind of commented a little bit on there. I was wondering if you could just kind of poke around on the CapEx budget next year. As you sit here today, is there anything that you would flag that we should be aware of that could require capital next year? And as we think about CapEx over the medium term, how should we be thinking about that? Is that a percentage of sales? And then is the CapEx budget that we're seeing this year? Is that sustainable, or do you think it kind of moves up from there?

You need to consider a few factors. It's a great question, and as you anticipated, it's not easy to answer. Think about the turnover in the ROV that we discussed in this meeting. We're upgrading ROVs and enhancing the capabilities of conventional ROVs, while also modifying some for the renewables market, which is a positive development. This relates to contracts and the shift towards renewables, so I see that as beneficial. I'm also enthusiastic about investments in new market opportunities, which are the growth areas I expect we'll continue to focus on. It is harder to predict whether we'll need to acquire assets for a contract or similar situations. If those opportunities arise, they should bring increased revenue and EBITDA. If you ask whether it's sustainable, I would say yes, particularly if you're growing and can maintain it as a percentage of revenue like you mentioned. It seems you're approaching it from the right angle.

Perfect. That's a very helpful answer. And then your leverage ratio is down to 1.5 times. You guys seem to be more confident that the 2024 maturity was under control than any point in the past couple of years for sure. Is there a target leverage that you all can share with us that you are looking for at this point in the cycle? And then as you get there, I know you mentioned some potential growth CapEx. Could you just talk about other capital allocation priorities that you could have heading into next year?

Yeah, Mike. Yeah, I certainly think, obviously, the lower the leverage ratio, the more comfortable we are as a company. But I think it's getting that fine balance of being able to have some growth CapEx in our plan for next year. I mean you ask Rod, is it sustainable? Yes if you're not growing. But I think it's looking for those niche technologies, looking for opportunities to find other ways we can grow into adjacent markets from where we are today. And I think that's where we would probably spend a little more on the CapEx. I don't think it's going to be one that would change our overall leverage ratio significantly from where we're at today though. So I think the 1.5 is certainly given our guidance for free cash flow this year and the expectations that you can start reading through into next year should be reasonably well there. So that would just point towards a potential lower leverage ratio.

Mike, I'd just add when we talk about the capital, the ROV fleet being fairly stable if the drill support market is stable that's that renewal and replacement that tends to go on. But on the good side if you start to see other fleets that we would like to be operating, people movers, hospital AGVs for hospitals and manufacturing plants. Those would be the kinds of things that I would speak to as the good upside.

Yeah. And I think the other part of that leverage ratio, we're always looking at is what is the runway when does the maturities really come due? If they were due tomorrow that would lead us to maybe a slightly different conclusion, but with the debt maturities into 24 and 28 that gives us confidence we have the ability to deal with them.

Yeah. Thank you.

Thanks Mike.

Hi, good morning, and thanks for taking my question. Good to see the 2021 EBITDA guidance range moved higher. I guess my question is for the back half of the year, it sounds like you've got some better visibility towards a healthy seasonally adjusted level of activity for IMR work in the Gulf of Mexico. Just thinking about the high end and the low end of that range. Could you just help frame for us, what the primary wild cards would be or drivers on getting to the high and low end of that range? Is it primarily the level of IMR activity you're seeing or that you will see, or are there some other factors that could play a role as well?

No, you got it. And remember IMR runs through both Subsea Robotics and OPG. So if we see a longer season where there are more boats on the water more IMR work that seasonal activity kind of extending out really strong through the third quarter and even bleeding into the fourth quarter, you could see the high end of the guidance coming from both the Subsea Robotics business and OPG. So yes, that's good news that believes in both of those businesses.

Got it. And my follow-up, you touched on this a bit in Q&A already, but if I heard you correctly, you added two Isurus systems in Q2. And I'm just curious how conversations with customers are progressing around some of these new technologies like Isurus and the Freedom and Liberty vehicles. And it sounds like you can do these retrofits in a pretty capital-efficient manner. But just curious about what we should see moving forward in terms of market adoption of those sorts of technologies?

Yes, I appreciate your point. Firstly, there is a retrofit aspect to consider. However, if I had to prioritize, the demand for Isurus is immediate, as it pertains to shallow water operations in the renewable sector. This is why we are increasingly discussing the addition of those units. Moreover, Isurus is compatible with many of our existing support systems, such as the overboarding and wind systems that lower it into the water, as well as the control cabins. This compatibility allows us to effectively recycle existing hardware to deploy an Isurus system, which lowers costs and accelerates our delivery timeline. This makes it a top priority. Next is Liberty, which serves as the resident system. It shares many features with traditional ROV systems but requires a bit more capital investment due to its battery pack and buoy, among other elements. However, it's closer to deployment because it aligns with the technical readiness level of solutions currently in use. Customer confidence in this technology is quite high. Lastly, Freedom introduces significant new capabilities, but its technical readiness involves more complexity, requiring additional trials and validation. While it presents greater potential than the other two systems, it also comes with more challenges. Overall, I see Isurus as a practical choice for immediate operations, while Freedom unlocks opportunities for the future. Each of these innovations will evolve on their own timelines, which is promising for our growth.

Great. Thanks for the answers.

Yes. Thanks, Taylor.

You have no further questions at this time.

Thank you very much. Well, since there are no more questions, I'd like to wrap up by thanking everybody for joining the call. This concludes our second quarter 2021 conference call. Have a great day.

This concludes today's conference. You may now disconnect.