Oceaneering International Inc

NYSE:OII

Earnings Call Transcript 2023-Q2

[Operator]

My name is Brian, and I will be your conference operator. Welcome, everyone, to Oceaneering's Second Quarter 2023 Conference Call. [Operator Instructions]

With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations.

[Mark Peterson]

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

[Rod Larson, President and Chief Executive Officer]

Good morning, everybody, and thanks for joining the call today. I'd like to begin by emphasizing that our business activity is increasing and demonstrating quantifiable improvements from accelerating deepwater and nonenergy market fundamentals. Here are a few supporting data points.

On a consolidated basis, we produced operating income of $49.2 million in the second quarter of 2023, our highest quarterly operating income since 2015. For the first half of 2023, our energy segments generated an 18% increase in revenue and nearly a 100% increase in operating income as compared with the first half of 2022. Our near-term rolling sales funnel at 6/30/2023 was more than 35% greater than at the same time last year. And inbound orders year-to-date 2023 versus 2022 are up over 20%.

We expect strong offshore market dynamics to continue for the foreseeable future with robust bidding activity supporting our expectation for growing backlog and increasing activity in our energy segments. Market dynamics are also favorable for our Aerospace and Defense Technologies segment or ADTech and autonomous mobile robotics business or AMR. Based on our year-to-date results and our current expectations for the second half of 2023, we are narrowing our adjusted EBITDA guidance by raising the lower bound of the previous range and adjusting the range higher for our projected free cash flow. We now expect to generate between $275 million and $310 million of adjusted EBITDA and $90 million to $130 million of free cash flow for the full year.

Now I'll focus my comments on our performance for the second quarter of 2023, our current market outlook, Oceaneering's consolidated and business segment outlook for the third quarter of 2023, and Oceaneering's revised consolidated 2023 outlook, including revised adjusted EBITDA and free cash flow guidance ranges. After these comments, I'll then make some closing remarks before opening the call to your questions.

Now to our second quarter summary results. Our second quarter 2023 results increased significantly compared to the first quarter of 2023 as we generated adjusted EBITDA of $74.8 million. This result was slightly outside the bottom end of our guidance range provided at the beginning of the quarter, primarily due to negative impacts from higher project costs in our entertainment business and the delay of project starts in our Offshore Projects segment or OPG.

During the second quarter of 2023, all of our operating segments generated higher revenue and with the exception of our Manufactured Products segment, each of our operating segments reported operating income growth led by increases in our OPG and Subsea Robotics or SSR segments. Operating results benefited from seasonal and market influences that resulted in an 11% sequential growth in consolidated revenue. Compared to the first quarter of 2023, our energy segments in aggregate, led by OPG and SSR, posted a 13% revenue increase and significantly improved operating results in the second quarter of 2023.

Our nonenergy segment, ADTech, also produced significantly improved operating income as compared to the first quarter of 2023. Consolidated operating income increased by $22.4 million in the second quarter of 2023, an 84% increase as compared to the first quarter of 2023, with all of our operating segments generating positive operating income and positive EBITDA.

Now let's look at our business operations by segment for the second quarter of 2023. SSR revenue increased over 10%, and operating income increased significantly as expected, with healthy demand for ROV and tooling services being slightly offset by some project delays and related vessel preparation costs in our survey business.

SSR EBITDA margin of 30% improved slightly as compared to the first quarter of 2023. The SSR revenue split was 78% from our remotely operated vehicle, or ROV business, and 22% from our combined tooling and survey businesses compared to the 77-23 split, respectively, in the immediate prior quarter.

As expected, ROV days on hire were sequentially higher by 13% with 16,032 in the second quarter as compared to 14,228 during the first quarter of 2023. There were increases for both drill support and vessel-based services. Our fleet use was 61% in drill support and 39% in vessel-based services versus 65% and 35%, respectively, in the first quarter. We maintained our fleet count at 250 ROV systems, and our second quarter fleet utilization was 70%, up from 63% in the first quarter. This is the first quarter since our ROV fleet was reduced to 250 systems at the end of 2019, where utilization has averaged at or above 70%. Average ROV revenue per day on hire of $9,077 for the quarter was 1% lower than the first quarter of 2023.

The decline in average ROV revenue per day on hire was primarily due to increased equipment standby rates, which do not include crewing charges. I should emphasize the increasing amount of standby revenue reflects improving contract terms related to the idle time that were virtually nonexistent in recent years. This is accretive to revenue and does not diminish our forecast for improving average revenue per day in 2023. At the end of June, we had ROV contracts on 91 of the 147 floating rigs under contract or 62% market share, an improvement over the 61% recorded for the quarter ending March 31, 2023.

Turning to Manufactured Products. This segment generated second quarter 2023 operating income of $10.6 million on an 11% sequential increase in revenue. Revenue increased primarily due to the receipt of certain umbilical materials that did not contribute to current quarter operating results. Operating results declined modestly as compared to the first quarter of 2023 with project losses in our entertainment business, offsetting consistent positive energy-related manufacturing performance.

Our Manufactured Products backlog on June 30, 2023, declined to $418 million compared to our March 31, 2023, backlog of $446 million. Bidding activity remains strong in our energy and AMR businesses. Our book-to-bill ratio was 0.79 for the 6 months ended June 30, 2023, and 1.19 for the trailing 12 months and is expected to be in the range of 1.2 to 1.4 for the full year of 2023.

For OPG, second quarter 2023 revenue and operating income increased significantly compared to the first quarter of 2023, primarily due to greater activity and utilization across all geographic regions and partially offset by certain planned installation work in the Gulf of Mexico shifting into the third quarter of 2023. Operating income margin improved to 13% in the second quarter of 2023 from 5% in the first quarter of 2023 as a result of higher overall utilization, driven by seasonal demand.

Integrity Management and Digital Solutions, or IMDS, second quarter 2023 operating income was higher on a 5% increase in revenue as compared to the previous quarter. An increase in scope on several international projects contributed to the revenue increase. Operating income margin of 6% improved slightly from 5% recorded in the first quarter of 2023.

Our ADTech second quarter 2023 operating income increased as compared to the first quarter of 2023 on a 3% increase in revenue. Operating income margin of 12% increased as expected from the 9% margin achieved in the first quarter of 2023. Unallocated expenses of $36 million remained relatively flat compared to the first quarter of 2023.

Now I'll address our outlook for the third quarter of 2023. On a consolidated basis, we expect a sequential increase in third quarter 2023 results on a high single-digit percentage increase in revenue. Our operating segments are expected to post a low- to mid-teens percentage increase on adjusted EBITDA results as compared to the second quarter of 2023.

However, based on our improved full year 2023 performance outlook, third quarter 2023 unallocated expenses are forecast to increase to the mid-$40 million range as we anticipate higher accruals as performance-based incentive compensation we booked during the quarter. As a result, consolidated adjusted EBITDA is expected to be in the range of $75 million to $85 million for the third quarter of 2023.

For the third quarter of 2023, operations by segment as compared to the second quarter of 2023, for SSR, we are projecting higher revenue and operating profitability in our ROV survey and tooling businesses with ROV utilization remaining in the high 60% to low 70% range on continuing robust offshore activity. SSR EBITDA margin is anticipated to improve as compared to the second quarter of 2023 with margins remaining in the low 30% range. We continue to see a trend of improving contract terms and pricing in our ROV business.

For Manufactured Products, we anticipate lower operating income on a mid-teens percentage increase in revenue. We expect operating income margin to decrease slightly due to project mix changes and to be in the mid-single-digit range.

For OPG, we expect a low-teens percentage increase in revenue and higher operating income with operating margins in the mid-teens range. Activity levels remain high, increasing slightly in international work and remaining stable in the Gulf of Mexico. For IMDS, we expect revenue to be relatively flat with operating income margin remaining in the mid-single-digit range. For ADTech, we forecast improved operating income and operating income margin on a modest increase in revenue.

Directionally, for our full year 2023 operations by segment, as compared to 2022, for SSR, we expect operating income to improve significantly on a high-teens percentage increase in 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, primarily in the back half of 2023. SSR forecasted EBITDA margin is expected to show an increasing trend through the second half of the year, averaging in the low 30% range for the full year.

For ROVs, we expect our 2023 service mix to remain about the same as 2022 mix of 61% drill support and 39% 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 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, 2023, there were approximately 23 Oceaneering ROVs on board 21 floating drilling rigs with contracts expiring at or before year-end 2023. During the second half of 2023, we expect 46 of our ROVs on 38 floating rigs to begin new contracts lasting beyond year-end.

For Manufactured Products, we forecast a significant increase in revenue and operating income results as compared to 2022. Although we expect lower operating income margin during the second half of the year as a result of changes in project mix, we continue to expect operating margin for the full year to improve over 2022, averaging in the mid-single-digit range for the year. Bidding activity in our energy and AMR businesses remains robust with high levels of quotation activity expected to continue into 2024. We continue to expect our full year 2023 book-to-bill ratio to be in the range of 1.2 to 1.4.

For OPG, we expect slightly higher revenue, significantly higher operating income results and improved operating income margin to the low- to mid-teens range, driven by more efficient vessel utilization and increased international activity. Given our expectation for continuing high vessel demand for the foreseeable future, we acted during the second quarter of 2023 to secure chartered vessel capacity for multiple years.

I want to deviate from my full year comments for a moment to talk in a bit more detail about our fourth quarter expectations for OPG. Based on our most recent forecast, we now have visibility into increased levels of international activity and expect operators to remain active in the Gulf of Mexico, moderating the familiar seasonal decline typically seen in the fourth quarter. We expect the higher demand levels to support pricing with operating incomes in the mid to high teens for the fourth quarter of 2023.

For IMDS, we forecast relatively flat operating income results on modestly higher revenue with operating income margin remaining in the mid-single-digit range for the year. For ADTech, we expect higher operating income results on increased revenue with 2023 operating income margin in the low teens percentage range. We remain excited about our ADTech business's position in the defense and government markets and see good growth potential for this segment again in 2024.

On a consolidated basis, our estimated organic capital expenditures total for 2023 remains the same, between $90 million and $110 million. This includes approximately $45 million to $50 million of maintenance capital expenditures and $45 million to $60 million of growth capital expenditures. We forecast our 2023 cash income tax payments to be in the range of $65 million to $70 million. Net interest expense is projected to be approximately $20 million in 2023 as we continue to benefit from investing our cash at higher interest rates. And unallocated expenses are expected to average in the high $30 million range for the fourth quarter of 2023.

Now turning to our balance sheet and liquidity. Our cash balance at quarter end was relatively unchanged from the prior quarter at $504 million. During the quarter, we received a CARES Act tax refund of $22.7 million, which was offset by increased working capital usage. We are increasing our guidance range for free cash flow generation to $90 million to $130 million for the full year. This guidance change reflects the inclusion of the CARES Act tax refund, which is partially offset by a higher amount of working capital required as a result of our improved outlook for the fourth quarter of 2023. We expect meaningful free cash generation during the second half of 2023, which is consistent with the last several years.

Liquidity remains strong with no borrowings under our senior secured revolving credit facility and no loan maturities until November 2024. With significant levels of free cash flow expected to be generated again in 2023, we remain well positioned to address our 2024 debt maturity while also funding strategic growth initiatives in energy and nonenergy markets.

In summary, based on our first half performance, current backlog and our prospects for the remainder of the year, we are narrowing our adjusted EBITDA guidance for full year 2023 by raising the lower bound of the previous range and now expect to generate between $275 million and $310 million of adjusted EBITDA. Beyond 2023, we believe the supportive macro indicators associated with our energy businesses remain in place, and we anticipate higher levels of offshore energy activity for the foreseeable future. This, combined with good growth opportunities in our ADTech and mobility solutions businesses, underpins our expectation for continuing improvement in our financial performance. We remain confident in our ability to transform Oceaneering as the energy transition continues to evolve. This confidence is underpinned by industrial knowledge and technology development in renewable energy and nonenergy markets.

Our key focus areas continue to be remaining dedicated to the safety and well-being of our employees and customers, generating substantial positive free cash flow, providing innovative and value-added solutions to our customers, generating efficiencies through increased asset utilization and expanding operating margins, and remaining focused on ESG principles for the benefit of our employees, our customers, our shareholders and our communities. We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take any questions you may have.

[Operator]

[Operator Instructions] First question comes from Eddie Kim with Barclays.

[Eddie Kim, Barclays]

So you called out 2 items that negatively impacted results during the quarter, the project delays in OPG and then higher project costs in the entertainment business. Based on your prepared remarks, it sounds like the OPG project delays is really just timing related in shifting from 2Q to 3Q. But could you expand a bit on the project losses in the entertainment business? Was this more of a one-off situation? Or is this something you expect to linger for the next couple of quarters?

[Rod Larson, President and Chief Executive Officer]

No, it's directly related to one single project. So it's something that we feel like is -- doesn't have overhang in the rest of the year.

[Eddie Kim, Barclays]

Okay. Got it. Thanks for clarifying that. And then I just wanted to just hear and ask about your expectations for orders in the Manufactured Products segment in the second half of the year. You did around 0.8x book-to-bill in the first half to maintain a full year book-to-bill guide of 1.2 to 1.4x. So on our math, that would require -- it looks like a near doubling of your order inbound in the second half just to meet the low end of that guide. So first, did I get that right? And if so, could you talk about the confidence level you have in the big step-up in second half orders coming through?

[Alan Curtis]

Eddie, this is Alan. One of the things we look at is in that side of the business, there tends to be larger-scale kind of episodic awards from time to time. And that’s what we’re seeing is we have several – visibility into several awards here in the back half of the year that will move the needle for us. So it was a timing kind of matter with the customer FIDs needing to be achieved and then when they will actually place the order. So we do feel good about it. We do have a pretty strong pipeline of projects and bids outstanding that we think will support that.

[Operator]

Your next question comes from Kurt Hallead with Benchmark.

[Kurt Hallead, Benchmark]

So just want to make sure I kind of get some understanding of dynamics right. So in terms of your ROV business, right, it tends to track what happens in both deepwater drilling and, to a certain extent, in subsea infrastructure. And we've seen a flurry of recent contract announcements by offshore drillers in terms of rising day rates and extension or longer duration of contracts. So just kind of curious, right, when you look back on cycle periods, last time day rates were at these levels, ROV rates were well north of $11,000 a day, which would infer another 20-plus percent upside from here. So is there any reason to think that the linkage between offshore rig rates and ROV rates has changed?

[Rod Larson, President and Chief Executive Officer]

No, I think we're spot on. And the numbers you're throwing out, leading-edge prices are good. It takes a while to run that through all our contracts. I know we've talked about that before. We really appreciated it when rates were dropping, right, that we had this duration of contracts and it kept us healthy for a longer period of time. Same way coming back in. It just takes a little while to get it all the way up there. But we don't see any headwinds in track in the same way. And we talked a little bit about the day rates currently. And a little bit of change this quarter, really, in some ways, is good news because we're getting more days in the sense that our contracts are improving, and we didn't get paid standby during the downturn. Now we're getting paid standby. So while it increases the overall revenue, it also increases the denominator. It adds some days that didn't even exist before. So it looks a little dilutive to the revenue per day, but it's still adding revenue and it's still adding days. So it's good stuff.

[Kurt Hallead, Benchmark]

Yes. It's a better contract term. Got you. So -- and the other dynamic, right, is beyond just the day rate element is contract duration, right? So like with any other company, whether it's a -- it doesn't matter what subsector it's in, you got some white space, you're going to have some cost absorption issues, right? So it looks like you're getting some -- instead of rigs being contracted 9 to 12 months, it looks like we're getting a series of rigs that are going to be 3 years, if not more. So the last time I checked, you can't run a rig without an ROV. And as long as your contract duration extends, can you help us understand how that helps your margin?

[Rod Larson, President and Chief Executive Officer]

It definitely helps the margin because if you're getting those longer durations, plus you're getting standbys. We talked a lot about churn in tougher years where the time between contracts, the time between even wells, we weren't getting paid. When we get into some of these longer-term contracts, you get paid either a day rate or a standby rate every day. And so all of that -- again, back to contract terms, both the standby time and the longer durations all add up to better numbers, better margins for ROV.

[Kurt Hallead, Benchmark]

And then coming back to the prior question about manufacturing products, right? It looks like you're going to have an acceleration in orders in the back half of the year. We've had other companies that participate in subsea like FTI talk about significant order bookings out through 2025 and increasing visibility out beyond that. You guys -- the biggest business in Manufactured Products, if I'm not mistaken, is umbilicals, which kind of ties into subsea infrastructure. So I was wondering if you look at the dynamics right now, the backlog coming in, how do you feel about the margins and backlog that you're going to book from this point forward? And what does that mean for margin improvement going out into next year?

[Alan Curtis]

Kurt, if you look at how we are viewing that today, certainly, the contracts we're bidding at current are better margins than what we did last year. So we are seeing improvement in pricing currently that would start to impact, as you indicated, kind of the back half of '24 and more in '25 even and then some of them are going into '26. So we are starting to see a -- this is that long cycle business that we have that benefits from these contracts. I mean, long lead materials that we're ordering are 12 months out on some of these contracts. So we will start to take revenue recognition on these until we get all the parts in, for the most part, and can start to assemble the umbilical. So visibility is increasing in the longer term, late '24, '25. Part of what we have, looking at from the margin progression you described, is we've talked about one storage contract right now that we're working through with a customer this year. That's certainly a higher margin perspective that we'll be rolling off, and we'll get back to more of a traditional manufacturing margin next year. So I think it's also...

[Kurt Hallead, Benchmark]

So Alan, does that mean...

[Alan Curtis]

Just one more thing on Manufactured Products is where we talk about bookings going way out into the out years from umbilical plants being loaded, some of our higher-margin businesses, some Grayloc and Rotator and some of that work, we've got some capacity left. And so just increased subsea activity allows us to sweat those assets, load those plants up and do more work at that higher margin too, which bodes well for the overall performance of the group.

[Kurt Hallead, Benchmark]

I mean do you have line of sight to double-digit margins in this business given the stuff that's coming through backlog?

[Alan Curtis]

I think we certainly have line of sight to the double-digit margins. In fact, if you look at Q1, we were at low double digits there. When we look at some of the nontraditional things we do with mobility solutions, specifically with the mobile robots that we're working on, they're actually margin dilutive today. We are investing some money there to build that baseline business. We have good traction with some customers right now, but we are building the first units. So as you would expect, first units are going to cost a little bit more. And so we do look to get some efficiency gains through some operational excellence programs, getting more volume, and those will help the overall margin as well as we move forward. But it is a little bit of a drag right now as we invest.

[Rod Larson, President and Chief Executive Officer]

But the good part is the pipeline looks great. And so we expect we'll be able to get the benefit of that investment.

[Kurt Hallead, Benchmark]

Okay. What is the total addressable market? You booked those automated forklifts in the first quarter of this year, I believe, your initial order. So what do you think the total addressable market is for that business in particular?

[Alan Curtis]

Just on that forklift market, it’s probably in the $3 billion range. We look at some of the market and market research kind of things that are out there. It’s a very large market that is growing at the same time. So we’re very interested in how we can continue to apply technologies that we already are very good at with the ROVs and other robotic applications into this market space.

[Operator]

The next question comes from David Smith with Pickering Energy Partners.

[David Smith, Pickering Energy Partners]

Most of my questions have been asked, but I would like to circle back to your comments in the prepared remarks about securing charter vessel capacity for multiple years. I was wondering if you could give any color on the number of vessels, maybe the type or duration or if there's any geographical concentration? And really wondering, is this a reaction to shrinking spot market availability? Or do any of these charters maybe line up with potential project opportunities that might have some real duration?

[Rod Larson, President and Chief Executive Officer]

Yes. And it’s a moving number, but let’s just say it’s 3 plus. And some of that is for Gulf of Mexico spot market, to your point, because we need to make sure we’ve got availability. But others are targeted towards specific international opportunities. We’ve got international opportunities right now that we’re – that we’ve been awarded in Guyana, in the Black Sea, in West Africa, things that we’re working on for the Caspian. So the international market looks really strong for us. But we need to lock in some of that capacity because the spot market overseas is a little more challenging because you don’t know if the boat is going to be where you need it, when you need it. So we’re going to make sure – we’ve had to make some commitments there as well.

[Operator]

There are no further questions at this time. I'll now turn the call over to Mark.

[Rod Larson, President and Chief Executive Officer]

All right. Well, since there are no more questions, I just want to thank everybody for joining the call. And this concludes our second quarter 2023 conference call. Have a great day.

[Operator]

This concludes today's conference call. We thank you for participating and ask that you please disconnect your lines.