Oceaneering International Inc Q2 FY2022 Earnings Call

Good morning ladies and gentlemen, and welcome to the Oceaneering International Inc. 2022 Second Quarter Earnings. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct the question and answer session. This call is being recorded on Thursday, July 28, 2022. I would now like to turn the conference over to Mark Peterson. Please go ahead.

Thank you. Good morning, everyone and welcome to Oceaneering's second quarter 2022 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.

Good morning, everyone. Thanks for joining the call today. I'm pleased to confirm that the resurgence of offshore activity that we anticipated to start in the second quarter of 2022 is materializing and is beginning to be reflected in our results. Specifically, our Subsea Robotics (SSR) and Offshore Project Group (OPG) segments generated some of the highest levels of revenue and the highest operating income seen since the beginning of 2018, which is the earliest period restated to reflect our 2020 segment realignment. Our first half 2022 financial performance unfolded slightly below our expectations due to challenges in hiring offshore personnel, primarily in the Gulf of Mexico, resulting in some delayed projects and missed opportunities. In addition, the continuing resolution earlier in the year negatively impacted revenue mix and timing in our Aerospace and Defense Technologies (ADTech) segment. We see strong market dynamics supporting robust activity in offshore markets during the second half of 2022, partially muted by timing uncertainties within our ADTech segment. Given our first half 2022 performance and our expectations for the second half of 2022, we're updating our adjusted EBITDA guidance range to $210 million to $240 million for the full year. We believe the confidence in the offshore industry is returning as the world is gaining a greater appreciation for energy security and the need for dependable forms of energy during the energy transition process. This combined with good growth opportunities in our ADTech businesses and mobility solutions 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 2022, our current market outlook, Oceaneering's consolidated business segment outlook for the third quarter of 2022, and Oceaneering's revised consolidated 2022 outlook, including lower adjusted EBITDA and free cash flow guidance ranges. After these comments, I will then make some closing remarks before opening the call to your questions. Now, for our second quarter summary results. Our second quarter 2022 results increased significantly as compared to the first quarter of 2022, as we produced adjusted EBITDA of $53.5 million, which was within the guidance range provided at the beginning of the quarter. As noted above, the levels of activity and earnings in our energy-driven businesses were significantly improved. However, a large project sale in our entertainment business did not complete in the quarter, and the mixing timing of projects in our ADTech businesses contributed to the lower quarterly results and margins in our manufactured products and ADTech segments. During the quarter, our cash balance declined by $70 million to $368 million, largely due to an increase in receivables. We are concerned to see our customers extending payment terms and are actively working with them to improve the situation. Despite the consumption of cash during the first half of 2022, we continue to expect positive free cash flow generation for 2022, but are revising our guidance range to $25 million to $75 million for the full year. Operating results benefited from seasonal and market influences that resulted in a 17% sequential growth in revenue. As expected, compared to the first quarter of 2022, our energy segments in aggregate, led by SSR and OPG, posted a 20% revenue increase and significantly improved operating results in the second quarter. Energy segment results were slightly offset by a sequential decline in operating results for our ADTech segment. Consolidated operating results increased by $23.9 million in the second quarter of 2022 as compared to the first quarter of 2022, with all our operating segments generating positive EBITDA. Now, let's look at our business segments, operations by segment for the second quarter of 2022. SSR revenue and operating income both increased significantly as expected, with healthy levels of seasonal activity for ROV, survey, and tooling services. SSR's EBITDA margin of 28% improved sequentially with the increased activity better aligning with the additional costs incurred during the first quarter. We also started to realize recent pricing improvements. The SSR revenue split was 77% from our remotely operated vehicle (ROV) business, and 23% from our combined tooling and survey businesses, compared to 76% and 24% split respectively in the immediate prior quarter. As we've forecasted, sequential ROV days on hire increased based on standard seasonality and recovering offshore activity, with an increase in days for both drill support and vessel-based services; days on hire were 14,631 as compared to 11,842 during the first quarter. Our fleet use was 57% drill support and 43% in vessel-based services, versus 63% and 37% respectively in the first quarter. We maintained our fleet count at 250 ROV systems, and our second quarter fleet utilization was 64%, up significantly from 53% in the first quarter. During the second quarter, we retired three of our conventional work class ROV systems and replaced them with two upgraded conventional work class systems and one high-speed Isurus work class ROV system that is currently engaged in renewables work. Average ROV revenue per day on hire of $8,278 was 1% higher than average ROV revenue per day on hire of $8,196 achieved during the first quarter. At the end of June, we had ROV contracts on 80 of the 137 floating rigs under contract, or a 58% market share, an improvement over the 55% recorded for the quarter ending March 31, 2022, when we had ROV contracts on 72 of the 131 floating rigs under contract. Turning to manufactured products, this segment produced an operating loss of $1.4 million for the second quarter of 2022 on revenue 28% higher than the first quarter's revenue. Revenue increased primarily due to the receipt of certain umbilical materials that did not contribute to current quarter manufacturing activity. Sequentially, operating results declined due primarily to less profitable work being executed in our mobility solutions businesses. Our manufactured products backlog on June 30, 2022, remained flat at $335 million compared to our March 31, 2022 backlog of $334 million. Our book-to-bill ratio was 1.1 for the six months ended June 30, 2022, and was 1.25 for the trailing 12 months. For OPG, second quarter 2022 revenue and operating income increased significantly compared to the first quarter of 2022, primarily as a result of increased inspection, maintenance, and repair (IMR) and installation work in the Gulf of Mexico. The sequential operating income margin increased from 1% in the first quarter to 15% in the second quarter of 2022, reflecting increased demand and significantly improved pricing for vessel-based services in the Gulf of Mexico. Although it was a very good quarter, it could have been better, as we were negatively impacted by customer-driven project delays and ongoing industry-wide hiring challenges, particularly in the Gulf of Mexico, which resulted in missed opportunities. Integrity Management and Digital Solutions (IMDS) operating income was essentially flat on a 5% increase in revenue. Higher seasonal activity contributed to this revenue increase. Operating income margin of 6% was the same as recorded for the first quarter of 2022. Our ADTech second quarter 2022 operating income declined from the first quarter of 2022, despite a 5% increase in revenue. The operating income margin of 10% declined more than expected from the 15% margin achieved in the first quarter of 2022, due to changes in revenue mix and delays in certain projects where we incurred pre-contract costs. Unallocated expenses of $31.7 million were relatively flat compared to the first quarter of 2022. Now, I'll address our outlook for the third quarter of 2022. We are projecting a sequential increase in third quarter 2022 consolidated results on increased revenue, with adjusted EBITDA in the range of $60 million to $70 million. For our third quarter 2022 operations by segment compared to the second quarter of 2022, for SSR, we are projecting higher revenue and operating profitability in our ROV, survey, and tooling businesses, with ROV utilization increasing to the high 60% to low 70% range. SSR's EBITDA margin is anticipated to improve but remain in the high 20% range, as the benefit of recent pricing improvements is increasingly reflected in our results. For manufactured products, we anticipate higher operating income on a modest decrease in revenue. We expect operating income margin to improve to the low to mid-single digit range. Quotation activity is robust within our energy businesses, and interest is increasing in our mobility solutions businesses. For OPG, we expect a significant increase in revenue and higher operating results, with operating margins remaining in the mid-teens range. Global offshore activities are expected to remain high, with the Gulf of Mexico in particular experiencing high seasonal IMR and installation activity through the third quarter. For IMDS, we expect revenue to increase modestly with a slight improvement in operating income margin. For ADTech, we forecast relatively flat operating income on a slight increase in revenue. We expect continuing project delays and higher pre-contract costs through the third quarter. Unallocated expenses are expected to be in the low to mid $30 million range. Directionally, for our full year 2022 operations by segment as compared to 2021, for SSR, we expect operating results to improve on higher revenue. ROV days on hire are projected to increase year-over-year with minor shifts in geographic mix. Results for tooling-based services are expected to increase with activity levels generally following ROV days on hire. Survey results are also expected to improve on growing geophysical activity. SSR's forecasted EBITDA margin is expected to show an increasing trend through the second half of the year, as an increasing percentage of work reflects recent pricing improvements in addition to the increased levels of personnel utilization. EBITDA margin is expected to average in the high 20% range for the full year of 2022. For ROVs, we expect 2022 service mix to remain about the same as 2021 mix, with 60% drill support and 40% 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-60% range for the year, again, with higher seasonal activity during the second and third quarters. Subject to quarterly variances, we continue to forecast that our market share for the drill support market will remain in the 55% to 60% range for the foreseeable future. As of June 30, 2022, there were approximately 30 Oceaneering ROVs on board 25 of the 35 floating drilling rigs with contract terms expiring by year-end. During the second half of 2022, we expect 46 of our ROVs, on 40 of the 61 floating rigs to begin new contracts. For manufactured products, we forecast higher operating results on a significant increase in revenue as compared to 2021. We expect the current high quotation activity in our energy businesses to result in solid bookings for 2022, and the increasing interest in our mobility solutions businesses to result in a good pipeline of opportunities for 2023. The anticipated entertainment-related product sale mentioned in connection with our second quarter 2022 EBITDA guidance range is now projected to conclude in the second half of 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 1.3 for the full year. For OPG, we forecast a significant annual improvement in both revenue and operating results. Good vessel utilization is expected to continue into the fourth quarter with operators remaining active with shorter cycle IMR and installation work in the Gulf of Mexico. We feel well-positioned to capitalize on these opportunities with the additional vessel charters entered into earlier this year. Although we expect a typical seasonal decline during the fourth quarter, current projections show activity remaining significantly above the levels achieved in the fourth quarter of 2021. We expect the higher demand level to support pricing, and operating income margins to remain in the low to mid-teens for the fourth quarter of 2022. For IMDS, we forecast lower operating results on higher revenue, with operating income margins averaging in the mid-single digit range for the year. As this is a people-intensive business, we're experiencing inflationary pressures on our direct costs, which are resulting in lower margin expectations for 2022. We are working to mitigate this margin deterioration by introducing further cost improvements internally and implementing contractual increases to be passed on to our customers. We currently project improved operating income margins for the second half of 2022 as compared to the first half of 2022. For ADTech, we expect lower operating results on relatively flat revenue. We are anticipating improved project activity during the fourth quarter, with operating income margins recovering to the low to mid-teens range. For the full year 2022, we expect operating income margin to average in the low double-digit range. We remain encouraged about our ADTech businesses and see good growth potential for this segment in 2023 and beyond. We are reducing our estimates for 2022 organic capital expenditures to a range of $70 million to $80 million to better align with our free cash flow expectations. This includes approximately $40 million to $45 million in maintenance capital expenditures and $30 million to $35 million of growth capital expenditures. The forecast for 2022 income tax payments will be in the range of $40 million to $45 million. Unallocated expenses are expected to average in the low to mid $30 million range for the second half of 2022. Now, turning to our balance sheet and liquidity. As previously announced, we entered into a new revolving credit facility in the second quarter of 2022, which provides access to substantial liquidity through April of 2026. This new facility, when combined with our cash balance, gives us good flexibility to both grow our businesses and to address the maturity of our 2024 notes. We expect a meaningful reversal from cash consumption during the first half of 2022 to significant cash generation during the second half of the year, and now expect to generate between $25 million and $75 million of free cash flow for the full year. Liquidity remains strong with no borrowings under our new $250 million secured revolving credit facility with no loan maturities until November 2024. In summary, based on our expectations for the second half of 2022, we are updating our adjusted EBITDA guidance to a range of $210 million to $240 million for the full year. Beyond 2022, we believe that the macro indicators associated with our energy businesses will continue to be strong and we anticipate high levels of offshore energy activity over the next three to five years. This combined with good growth opportunities in our aerospace and defense businesses and mobility solutions businesses underpin our general expectation for increased activity over the next several years. We remain focused on energy transition and the need to transform our businesses to thrive as the world evolves. With healthy levels of free cash flow projected over the next several years, we expect to have the flexibility to make investments to transform our businesses and deal with our 2024 debt maturity. Our key focus areas are retaining and attracting top talent to maximize access to near-term opportunities, ensuring that our pricing is appropriate for the current market, generating significant levels of free cash flow in the second half of 2022, and most importantly, delivering value-added solutions utilizing our services and products with high levels of quality and safety. We appreciate everyone's continued interest in Oceaneering and we'll now be happy to take any questions you may have.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. The first question comes from Jim Schumm from Cowen. Please go ahead.

Hey, good morning, guys.

Good morning, Jim.

So, the Subsea Robotics margin guidance for the year was revised lower. I'm assuming some wage increases are pressuring your margins there. What's the opportunity to raise prices in the segment to offset any cost increases?

We are still expecting a high 20 average for the year, which suggests an exit rate of around 30, give or take. This isn't a significant downward revision, and I want to clarify that. Regarding pricing, it's a pertinent question, and I'm pleased you brought it up. In OPG, we can adjust prices almost immediately as it's a call-out business. We respond to market changes in real time, particularly for our jobs in the Gulf of Mexico, although it’s not as quick internationally. ROV pricing, on the other hand, is tied to contracts that span six months to several years, which makes adjustments more challenging and slower to implement. We're beginning to see improvements, and we anticipate this trend will continue as noted throughout the year, although the process is gradual. The upside is that during the market decline, we managed to maintain our margins for an extended period due to the longer contract terms, which means our pricing adjustments occur at a different pace compared to some other segments.

Understood. Thanks for that. And then, just looks like the math on the implied fourth quarter EBITDA calls for $75 million at the midpoint. The third quarter guidance midpoint is $65. And typically the fourth quarter is a weaker quarter for you. So, why is the fourth quarter significantly stronger this year? And how achievable is that?

First of all, we've got the ADTech. We mentioned ADTech, and we're seeing project improvement in the fourth quarter. We believe that we're going to have a longer season in OPG. We do see an increase in walk-up for ROV. Alan, is there anything else I'm missing?

The product sale and manufactured products we mentioned in the call notes were originally expected to wrap up in Q2. However, it now looks like it will happen in the second half of the year, likely in Q4. This will be one of the factors that boosts Q4 performance. Additionally, as Rod pointed out, if we analyze ROV pricing, we anticipate margin growth starting in Q3, with a further increase expected in Q4.

Got you. Okay. Thank you very much.

Thanks, Jim.

Thank you. No further questions at this time, you may proceed. I apologize. Oh, I'm sorry. We do just have a follow-up that came in from Jim Schumm. Please go ahead.

Okay. Let's try.

So the last one for me. Just given your concerns regarding receivables, just what's the risk of a write-down here? How confident are you getting paid there?

So, Jim, this is more about activity-based issues where our customers are working. We're trying to find personnel just like we have been sourcing. I believe some of the bills being sent are not getting approved as quickly as we would hope due to their activity levels. The customers we are examining have cash from our perspective. I don't see this as a collection or credit issue, but rather a timing issue with their ability to process some of these bills promptly. Therefore, I think the main concern is not their ability to pay, so it does not appear to be a collection issue that would require a write-off.

Right, I wouldn't think at this point there would be credit-worthy issues, but I just wanted to get your thoughts on that. Thank you.

Great question. I appreciate it.

It's a very generalized phenomenon across some of the big guys and even some of our non-oil customers as well. So, it is very broad-based. It doesn't necessarily spike out any payment risk.

Right. I don't think you're alone necessarily for oil field services, but just wanted to clarify. Thank you.

Great question. Thanks, Jim.

There are no further questions. You may proceed.

All right. Well, since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. And this concludes our second quarter 2022 conference call. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.