Earnings Call Transcript - OII Q1 2023

Operator, Operator

Good morning, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. Welcome to Oceaneering's First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer period after the speakers’ remarks. With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

Mark Peterson, Vice President of Corporate Development and Investor Relations

Thanks, Michelle. Good morning, everyone, and welcome to Oceaneering's first quarter 2023 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 first quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Roderick Larson, President and Chief Executive Officer

Good morning, and thank you for joining the call today. Our first quarter financial results exceeded both our guidance and consensus estimates, reinforcing our belief in the ongoing recovery of the offshore energy sector. We see favorable market conditions that are likely to support healthy activity levels and continued price improvements in most of our energy businesses for the remainder of the year. Consequently, we are maintaining our original adjusted EBITDA guidance for 2023 at $260 million to $310 million, and we expect to generate free cash flow between $75 million and $125 million. Today, I will discuss our first quarter performance, our outlook for the second quarter and the full year of 2023, our balance sheet and liquidity position, and the encouraging macro data points influencing our markets. In the first quarter, we reported a net income of $4.1 million or $0.04 per share on revenue of $537 million. These results included $0.3 million in pretax adjustments from foreign exchange gains and $1.5 million from discrete tax adjustments, mainly due to changes in valuation allowances and share-based compensation. Our adjusted net income was $5.4 million or $0.05 per share. Overall, our first quarter results were better than guided due to higher revenue than expected, suggesting ongoing recovery in our offshore markets. Our consolidated first quarter revenue remained stable compared to the fourth quarter of 2022, with increases in our manufactured products and Integrity Management and Digital Solutions segments offset by a seasonal revenue drop in our Offshore Projects Group. Compared to the first quarter of 2022, consolidated revenue for the first quarter of 2023 grew by over 20%, largely driven by significant revenue hikes in our manufactured products and Subsea Robotics segments. This uplift is especially positive given that the first quarter has historically been our weakest revenue quarter of the year. For the first quarter of 2023, our consolidated adjusted EBITDA reached $55 million, exceeding our guidance and consensus estimates. Now, let’s evaluate our business operations by segment for the first quarter of 2023. Although SSR saw a slight increase in revenue compared to the fourth quarter of 2022, operating income was lower, primarily due to the absence of prior quarter accrual releases and higher maintenance costs in preparation for increased activity. Consequently, the EBITDA margin dropped to 29% for the first quarter. The revenue split for SSR between our ROV business and our combined tooling and survey businesses remained steady at 77% and 23%, respectively. Our fleet utilization and days on hire were largely unchanged from the previous quarter, with utilization at 63%, up slightly from 62%. The first quarter utilization of our ROV fleet included 65% for drill support and 35% for vessel-based activities, consistent with previous quarters. Average daily revenue for ROVs increased by 2% to $9,176 compared to the previous quarter, with our fleet count maintained at 250 systems. By the end of March, we had ROV contracts on 90 of 148 floating rigs, improving from 83 out of 141 in the prior quarter. In manufactured products, operating income for the first quarter of 2023 saw a substantial improvement over the fourth quarter of 2022, driven by a 13% revenue increase and an improved margin of 10% compared to 6% in the previous quarter, thanks to enhanced cost absorption and a favorable project mix. Despite slower order intake, bidding activity remains strong, with a backlog of $446 million as of March 31, 2023. The book-to-bill ratio for the trailing 12 months was 1.27, down from 1.39 for the year ending December 31, 2022. OPG's operating income for the first quarter of 2023 declined as projected, with a 15% seasonal revenue decrease and an operating margin dropping from 9% to 5%. Meanwhile, IMDS's operating income was lower than the previous quarter despite an 8% revenue increase, with margins falling from 9% to 5%. ADTech also reported a sequential decline in operating income on flat revenue, with margins decreasing from 11% to 9% due to higher project costs. Unallocated expenses totaled $35.3 million, aligning with the lower end of our guidance range. In the first quarter, we utilized $42.9 million in cash from operations and an additional $18.3 million for capital expenditures, leading to a negative free cash flow of $61.2 million. As consistent with previous years, our cash balance decreased during the first quarter, declining by $64 million compared to a $100 million decrease in the same period of 2022. We ended the quarter with $505 million in cash and cash equivalents, without any borrowings from our secured revolving credit facility and no loan maturities until November 2024. Looking ahead to our outlook for the second quarter of 2023, we anticipate a significant improvement in our consolidated results, projecting adjusted EBITDA of $75 million to $85 million with a low to mid-teens percentage increase in revenue. For SSR, we foresee heightened activity in our ROV survey and tooling businesses, with substantially higher segment profitability. ROV days on hire are expected to rise in both drill support and vessel-based activities, resulting in 70% utilization. We forecast SSR's adjusted EBITDA margin to be in the low 30% range. In contrast, we anticipate higher revenue but lower operating profitability in manufactured products with margins expected to drop to the mid to high single-digit range due to project mix changes and increased material costs. Our energy products businesses continue to witness strong bidding activity. For OPG, we predict significantly improved revenue and operating results, with margins expected to rise into the mid-teens range. IMDS is forecasted to show relatively flat revenue and operating margins in the mid-single digits. ADTech is projected to increase revenue significantly with improved operating results, and we anticipate margins to rise to the low to mid-teens, benefiting from lower costs. As for our full year 2023 operations by segment, we forecast improved SSR results with a mid-teens percentage increase in revenue and increased ROV days on hire. We anticipate continued robust bidding activity in our energy businesses. For manufactured products, we expect a significant year-over-year increase in revenue and operating income, with a slight margin improvement. OPG is expected to remain relatively flat in revenue, but with enhanced operating income driven by increased vessel utilization. IMDS forecasts slight gains in operating income, while we predict ADTech will realize higher results on a low to mid-teens revenue increase compared to 2022. Our estimated organic capital expenditures for 2023 are projected to remain between $90 million and $110 million. Looking at our balance sheet and liquidity, our position remains strong with $505 million in cash and anticipated free cash flow in the range of $75 million to $125 million in 2023. This places us well to address our 2024 debt maturity. The current interest earned on our cash investments is offsetting our 2024 senior notes obligations, and we have additional flexibility from our undrawn credit facility. On a macro level, we are encouraged by signs of recovery in the offshore energy markets, with positive commodity prices projected to support activity levels. In summary, our strong first quarter results and outlook provide us confidence to maintain our 2023 adjusted EBITDA guidance. We are in a solid position to generate significant free cash flow while focusing on both energy and non-energy markets. We remain dedicated to safety, generating free cash flow, enhancing utilization, providing value to our customers, improving pricing and margins, and upholding ESG principles. Thank you for your continued interest in Oceaneering. We are now ready to take your questions.

Operator, Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. There are no questions from the phone lines, gentlemen, please proceed with any closing remarks.

Roderick Larson, President and Chief Executive Officer

Thank you very much. I'd like to wrap up by thanking everyone for joining the call. This concludes our first quarter 2023 conference call.

Operator, Operator

Ladies and gentlemen, this does indeed conclude your conference call for this morning. We would like to thank you all for your participation and ask you to please disconnect your lines.