Oceaneering International Inc (OII) Q4 2024 Earnings Call Transcript

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 Frisby, 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 gap 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 during 2024 we recorded notable order intake of 2.9 billion dollars demonstrating our customer viable services and products repurchased approximately 20 million dollars in shares demonstrated continued value for our customer further realized a 361 basis point improvement in subsea robotics or ssr even a margin year over year exiting 2024 attained our highest 15 and surpassed 100 million dollars in adjusted ebeta for the first one a contract from the Defense Innovation Unit to build a Freedom Vehicle, our Hybrid RV Autonomous Underwater Vehicle, AUV, and to a standard made Targeted Adjustment of Station Limited, or GDI, a UK-based provider of digital and software solutions and exits from other businesses. And I would be remiss, which in 2024 led to a 56% reduction in hybrids, nearly matching our record low TRI. Now I will focus my comments on for 2025. Our consolidated 2025 outlook, including our expectation cash flow in the range of $110 to $130 million and EBIT on the range of three and our segment net income of $56.1 million or 55 cents per share, a 26% consolidated revenue of $713 million is 9% 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 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 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 we generated 128 million dollars of cash from operating activities in the fourth quarter and invested approximately 34 million dollars in organic capital expenditures including 18 million dollars in growth and 16 million dollars in maintenance Additionally, as previously, we ended the quarter with free cash flow of $94.5 million in 2024. Now let's look at our business operations. Our operating income of $63.5 million. Even a 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 $15,000. ProV fleet use during the quarter of 6% 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. On December 31st, 2024, we had 59% of the contracted floating rig market, with ROV contracts on 84 of the 142 floating rigs over and the year just as we began, with a fleet turning to manufacture operating income of $4.2 million and operating income margin of 3% decline primarily due to reserve taken on an umbilical project. Year-end 2024 backlog was $604 million, a decrease of $17 million compared to December 31st, 2023. The book-to-bill ratio of 0.97 for the full year of 2024 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 dollars and operating income margin declined from five percent to three percent despite a nine point one million dollar increase in revenue primarily due to costs associated with acquisitions and divestitures in this previously announced we completed the acquisition of gdi which will report future financial results for fourth quarter 2024 operating income declined 1.1 million dollars and operating income margin declined to 10 percent on a 3.9 million dollar 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 oceanary technologies or o-tech division and the implementation of a discreet new erp system for ad tech that supports our growth strategy to become a prime fourth quarter 2024 unallocated expenses of 41.1 million dollars were in line with the guidance for the now i'll turn my focus to our full year 2024 results compared to 2023 for 2024 consolidated revenue increased 10 percent to 2.7 billion dollars from 2.4 billion dollars in 2023 with each of our operating segments achieving revenue growth Consolidated 2024 operating income of $246 million, improved by $64.9 million, and adjusted EBITDA of $300 by $58.2 million, or 20%. EBITDA gains in our SSR, manufactured products, and OPG segments more than offset declines in our IMDS. In 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. At year end, we had healthy liquidity with $498 million in cash and cash equivalents and an undrawn $250 million credit revolve. 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 break-even 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 for key energy related metrics that we track indicate that 2025 activity will be flat or slightly positive 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. The Deepwater Final Investment Decision, or FID, forecast indicates a year-over-year increase in 2025. Providing added support, tree awards, and project sanctions are indicators of the two- to five-year horizon for activities. Tree awards are forecasted to increase in 2025 with approximately 285 subsea trees expected to be awarded in 2025, as compared to 216 awards. Tree installations are forecasted to increase year over year, with approximately 350 installations forecasted for 2025, as compared to 330 installations in 2020. Drilling rig demand is expected to be flat in 2025. Changes in the geopause. 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 we are also monitoring the impact of budgetary reviews in the u.s on our government related markets at this time related markets continued growth for the 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 25 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 for 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, AdTech, and manufactured product segments. At the midpoint of this range, our 2025 EBITDA would represent a 17% increase over our 2024. We anticipate generating positive free cash flow of $110 to $130 million, as has been the case over the past several working capital changes associated with vendor payments and the payable expenditures to total between $130 and $140 million, approximately $52 to $56 million of maintenance capital expenditures, and $78 to $84 million of growth. 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, dollars, a range of 110 to 120 million dollars. This includes taxes incurred in countries that impose tax based on in-country revenue and bear no relationship to the profitability and continued pricing improvement. A stable overall demand for ROV days and improved results for tooling-based services are expected to generally follow ROV days utilized, expected to be in the high single-digit range, and EBITDA margins are expected to average in the mid-30% range for the full. For ROVs, we We project that our 2024 service mix of six-tenth 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, which during the year is foreclosed 70%. We expect to sustain our ROV market share in the 55-60% 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 in energy products, growth in our Greylock Connectors business, and improvements in our non-energy product line. 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 lightwell intervention and a meaningful reduction in dry dot 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 O-Tech as we commence work and recovery in our spaces. Operating income margins are expected to average in the low teens. For 2025, we anticipate unallocated expenses of $45 million per quarter. Now I'll discuss our outlook for the first quarter of 2025 as compared to the first quarter. 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. In COPEG, 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 dot costs and the related loss of vessel days that impacted the first quarter of 2024. For manufactured products, IMDS and ADTEC, we expect that revenue and operating results will be similar. We forecast unallocated expenses. In closing, I'd like to again thank our team of Oceaneers. It is their ingenuity, teamwork, and commitment to our 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.

Thank you. We will now begin a question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. if you would like to withdraw your question simply press star one again if you are called upon to ask your question and are listening via speakerphone in your device please pick up your handset to ensure that your phone is not on mute when asking your question again press star one to join the queue our first question comes from the line of eddie kim with barclays your line is open Hi.

Good morning. So the upward progression of your ROVs, the average revenue per day has been impressive at almost $10,800 in the quarter. Has that increased in pricing over the past several years? Has that been driven more by the billing support side or the vessel-based work or the combination of both? And just given the expectation of a lot of white space this year on deep water rigs, do you expect maybe a flattish kind of trajectory from 4Q levels through the end of the year? Or do you expect that we'll actually surpass about, you know, 11,000 a day as we move through the year?

Thanks, Ed. I would say, first of all, the pricing is coming from both. We're seeing improvements in both the vessel and the drill support. And then I guess we see the days or the activity being flattish, but because it's the realization of price, even from the exit rate we have, there's been ongoing negotiations. Obviously, it's not the same. I would say the bites come in smaller bites or the improvements come in smaller bites, but we're still seeing some upward progressions. So we expect to get even more through 2025, despite the flat days. And again, just kind of reassurance of that. Not unlike we had flattish days and flattish activity in 2024. We still see the opportunity to demonstrate value, 99% uptime, and get that improvement in price.

Understood. And my follow-up is just on your orders within the manufactured product segment. It looks like your book-to-bill for full year 24 was about one times, which was a slight decrease from 23 of about 1.3 times book-to-bill. Apologies if I missed it, but for this year, Is there any kind of guidance from an orders or a book-to-build perspective on what we should expect?

We haven't given that guidance, Ed.

I think right now we haven't provided the guidance, but I think, you know, in the call notes, Rod did describe our expectation that our sales pipeline remains healthy, and I think that's, you know, an indicator of our belief in future.

Got it. Great. That's all very helpful. I'll turn it back.

And our next question comes from the line of Kurt Haleed with Benchmark Company. Your line is open.

Hey, good morning, everybody. Morning, Kurt. Hey, appreciate the color as always. I guess in the context of recent conference calls, we've heard from effectively almost all the offshore drillers that, you know, there's going to be a reacceleration of contract activity occurring here, you know, through the first part of 2025, and obviously voting well for incremental activity in 26 and 27. So I guess a kind of two-part question around your ROV utilization assumptions, you know, for the year. You know, can you give us a reminder or a fresher on, you know, how potential downtime or white space on rigs and how you've kind of factored that in for 2025?

I think it's all in the days. I mean, when we talk about the activity, I think in the rig activity, it's in our plan as flattish. And that's, you know, it's hard to take the average of what everybody's telling you. I think when Alan and I talk about it, it feels like we're maybe closer to the trans-ocean story than maybe some of the others. And that's just the blend of the assets we're on. I talk about these higher quality assets. But I think there's lots of things going on under the water. One of the things that's helped us is we've, you know, quietly grown our market share in Brazil. And so we're pushing up higher there. We never used to talk that much about Brazil because some of the Petrobras contracts were pretty onerous. And now that we see more of the drilling contractors contracting ROVs directly and they really value uptime, we've been able to get better pricing and, again, more market share in Brazil.

So that's one of those things that happens that's sort of in the mix that gives us some protection. great appreciate that now uh maybe switching gears and just keeping the the topic of the uh you know uh mobile robotics uh forklifts you know that that business segment i know you guys have shifted your manufacturing uh to more of an outsource kind of model can you give us an update on on how that's progressing and give us an update on you know what kind of discussions you've been having with respect to incremental orders uh for uh for that business i i think the the best thing The outsourced manufacturing, we feel good about.

We feel good about the quality coming from there. I think we're watching the pipeline. Customers are still very bullish. They like the product. They've got their own kind of shuffling of the deck about we're not just sending these into one factory or two. We're worried so that as their schedule changes, where they want to put things, where they have time to kind of intervene into the production line, And that's that scheduling has been one of the things that we got to keep our eye on, as well as developing, you know, that the next big customer and kind of taking some of these people who have, I would say, taken trial levels of vehicles and turn them into larger volume buyers.

Okay.

And then just one more, you know, on the manufacturing product, obviously a decent book to book the bill on that front. What are some of the, can you give us a feel for the margin improvement kind of go forward? How much of that is, you know, better price backlog? How much of that is more efficient operations?

Just a little bit more, more fleshing that out if you can. yes all of the above yeah no i i was kind of motion to rot i would jump in on this one a little bit because i think we have been trying to signal that there there is some uh you know improved margin sitting in backlog that we were waiting for you know delivery of swan leave materials to come in which we've been taking receipt of and that's that's kind of giving us the confidence in the outlook for 2025 and you know the increase in revenues and increase a large amount of it is sitting there and it is the efficiency we gain by having continuous getting

the utilization we just tell everybody to watch what we're watching excellent appreciate that

color as always thank you again if you would like to ask a question press star then the number one on your telephone keypad and we have another question from josh jane with daniel energy partners your line is open thanks good morning uh first question just on offshore products or sorry offshore projects group um always moves around a bit um the q4 performance is quite strong and q1 outlook highlights significantly higher activity year over year maybe you could go into more detail about not only for q4 um you talked about west africa gulf of mexico but also

where you see some of the strength coming in 2025 and beyond hey thanks josh and and yeah you know we've been we've been trying to do the best to talk i'm going to go back to we hinted at this when we talked about capex deployment we we spent a lot of time and uh looking for these these growth things right these these pieces that are that are in our wheelhouse that are specialty but also things that we think grow faster than maybe the rest of the oil field if the oil field tempers a little bit these are things that are going to continue to grow because there's uptake on them light well intervention is one of the greatest ones and we make an investment there that light light well intervention work you know the cheapest barrels are the ones that are already if you've got if you've got wells that you can rework you can do the intervention whether it's a mechanical or a hydraulic intervention i mean those that's just really good work and that's and that's some of the best margin work for us you know we're doing it at a lower cost point for the customers because we're using a vessel of opportunity intervention vessel or we see the customers getting more and more excited about that again we see that we can invest in equipment and expand our footprint um that along with some of the rework of of infrastructure like we saw in the gulf in West Africa this year. Those are the things that, you know, we really think that have business rather than just those are longer contract equipment gets put on.

Okay, thanks. And just, I wanted to ask one on the ROV business, more of a focus on the vessel class rather than drill support. Could you speak to your, the visibility you have in the vessel class ROV market supply demand today and where, I guess, how tight the market is today and the multi-year opportunities set there? Because Because I would assume, as one of the other questions asked, that a decent amount of the day rate progression has come from this as well as drill support. So maybe you could just speak to those opportunities as well.

I'm not – when you say – are you talking like on the vessel side, installation vessels, pipeline versus – yeah. I mean, we see a fair amount. I mean, a lot of the really big vessels, pipeline stuff, a lot of those are done by customers who like to do their own ROVs. So those things aren't so much as you get down into what they call a multipurpose service vessel or an ROV support vessel. Those are the things we see, and utilization has been good. I mean, when we look for one of those, we find that the windows are not that easy to find. So I think the utilization of that.

And then maybe one last one, if I may, on M&A. You've made it clear in the past with free cash flow and incremental capital, you'd like to invest in potentially disruptive technologies. As the multiples have compressed in the public space, I'm curious if you've seen more M&A opportunities sort of come through over the last six to nine months or if the number of opportunities has sort of remained consistent with where we've been over the last year.

No, I think there's more stuff. I mean, I think we see more stuff. So that's exciting. You know, we're waiting for our perfect pitch probably is the way to put that. GDI was great. I mean, GDI is such an exciting thing for us because it – and I'm sure I've said this before, but what I love about it is it's really smart for infrastructure. We get a lot of bang for the buck because what they help you do is by taking a laser scan and a video, you can take that whole picture and determine corrosion and quantify corrosion. The cool part is that we're working really hard to get that deployed, and that's a double bonus, right? We've got GDI, we're taking the video, and we're doing the laser scanning with ROVs. So anything that creates more dive time for ROVs, things like that. So when we're watching the M&A space, we're really looking for the things that we are truly the best owner of.

Thanks. I'll turn it back.

That concludes the question and answer session. I would like to turn the call back over to Mr. Rawerson for closing remarks.

Thanks, Desiree. Since there are no more questions, I'll just wrap up by thanking everyone again for joining the call. And this concludes our fourth quarter and full year 2024 conference call. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now.