Q1 2020 Earnings Call
[music].
My name is myself and I will be your conference operator today I would like to welcome everyone to the Oceaneerings first quarter 2020 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer period with that I will turn the call over to Mark Peterson Oceaneerings Vice President.
Corporate development and Investor Relations.
Thank you Marcelo good morning, everyone and welcome to our generic first quarter 2020 results conference call. Today's call is being webcast a replay will be available on oceaneerings website.
Joining us on the coal or Rod Larson, President and Chief Executive Officer, who will be providing are prepared.
Comments on Curtis Chief Financial Officer, and Marvin Migura Senior Vice President.
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.
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 I'll turn the call over to Rob.
Good morning, and thanks for joining the call today.
What a difference a quarter mates, we began 2020 with the expectation of marginal growth and improving business fundamentals across all of our segments.
And then the cobot 19 pandemic erupted in field further deterioration of the crude oil market fundamentals as well as the theme Park business.
This deterioration is brought about swift changes to our customer spending plans that will never be negatively affect our businesses as long as these conditions. This.
As a result, we're taking decisive action to reduce costs in order to drive financial performance in this environment.
With the continuing threat and uncertainty around cobot 19, Oceaneering is actively taking steps to support the safety and well being of our employees and their families our customers and the communities, where we live and work.
We've implemented preventative measures and developed corporate and regional response plans based on guidance received from the World Health organization centers for disease control and prevention.
International Esso errors in our corporate medical advisor.
Our goal is to minimize exposure and prevent infection, while ensuring the continued support of our customers operations.
Now for our results.
For the first quarter, we reported a net loss for $368 million or negative 3.7 $1 per share on revenue of $537 million.
These results included the impact of $393 million, a pre tax adjustments, including $303 million associated with goodwill impairments $76.1 million of asset impairments and write offs $13.7 million in restructuring costs and foreign exchange losses recognized.
During the quarter.
Adjusted net income was $3.5 billion or four cents per share.
Despite significant global challenges, we're pleased that our first quarter adjusted results exceeded expectations.
The key factor in achieving these results was better than anticipated performance within our energy focused businesses, which included the benefit from cost reduction measures implemented during the fourth quarter of 2019 in the first quarter of 2020.
Each of our operating segments generated positive adjusted operating results and positive adjusted earnings before interest taxes, depreciation and amortization or adjusted EBITDA and our consolidated adjusted EBITDA of $51.6 million surpassed both our forecast and published consensus estimates.
Now, let's look at our business operations by segment first quarter of 2020.
Compared to the fourth quarter of 2019, RMB average revenue per day on higher decreased 4% on flat days on higher.
As expected ongoing cost control measures and efficiencies along with fewer installations in mobilizations resulted in improved adjusted operating performance and adjusted EBITDA.
Adjusted EBITDA margin increased to 32% and our of utilization improved slightly to 65%.
Keep in mind that although reported fourth quarter 2019 utilization was 58%. It did not include the impact of the 30 Rvs that were retired at the end of the fourth quarter.
For comparison pro forma fourth quarter utilization, reflecting these vehicles as if they have been retired at the at the beginning of the quarter with 64%.
During the first quarter, our fleet size remained at 250 vehicles the same as year end 2019.
Fleet use during the first quarter was 68% and drill support and 32% in vessel based activity compared to 64% and 36% respectively for the fourth quarter of 29 team.
At the end of March we had RV contracts on 95 of the 153 floating rigs under contract, resulting in a drill support market share of 62%.
Turning to subsea products' first quarter 2020, adjusted operating results exceeded expectations and were comparable to the results with the fourth quarter of 2019.
Richard products revenue and operating results met expectations.
Service in rental results outperformed largely due to higher activity in Norway and West Africa.
Our subsea products revenue mix for the quarter was 74% in manufactured products and 26% in service and rental compared to a 70 228 split respectively in the fourth quarter.
Our subsea products backlog at March 30, Onest 2020 was $528 million compared to $630 million at December 30, Onest 2019.
Reflecting the higher level of throughput and lower level of market activity, our book to Bill ratio for the first quarter was 0.5.
Subsea project sequential adjusted operating results declined on lower revenue as a result of seasonally lower vessel and survey activity.
Asset integrity adjusted operating results improved benefiting from cost reduction activities undertaken in the fourth quarter 2019 in the first quarter 2020.
For our non energy segment advanced technologies, our first quarter 2020, adjusted operating result was sequentially flat.
Adverse impacts of Govan 19 to our entertainment theme Park business results offset gains from our government service businesses.
As compared to the fourth quarter 2019, unallocated expenses declined during the first quarter 2020, as a result of lower accruals for incentive based compensation.
During the first quarter, we use $32.2 million of net cash in our operating activities and $27.2 million cash for maintenance and growth capital expenditures.
These two items represented the largest contributors to a $66.2 million cash decreased during the quarter.
As anticipated our cash balance decreased during the quarter, primarily as a result of a difference in timing associated the customer progress milestone cash collections and payments the vendors on several large contracts.
Additionally, during the quarter, we dispersion accrued employee incentive payments related to attainment specific performance.
In prior periods.
At the end of the quarter, we had $307 million in cash and cash equivalents no borrowings under our $500 million revolving credit facility and no loan maturities until November 2024.
As a clarification our revolver debt to cap Covenant is based on adjusted cash not equity on the balance sheet to determine adjusted cap, we get to add back all previously recognized impairments based on our determination as of March 30, Onest, we could draw down the entire $500 million and still be in compliance.
Moving onto our second quarter and full year outlook.
We're not providing operating or EBITDA guidance for the second quarter and full year, pointing 20 due to the lack of visibility in the majority of our businesses.
Many of the markets, we serve our being profoundly affected by the effects of Andrew associated responses to cobot, 19th as well as the significant reductions in our oil and gas customer spending as a result of the lower crude oil price environment.
We maintain our guidance that unallocated expenses are forecasted to be in the mid excuse me in the high $20 million range per quarter.
We are further revising or Brean capital expenditure guidance by lowering the rose to $45 million to $65 million and 2020 cash tax payments guidance by lowering range to $30 million to $35 million.
Directionally, we expect decreased demand for our services and products within our energy businesses. We anticipate further cobot 19 related impact store Entertainment business theme park operators are dealing with significant challenges, including the reduction in revenue as a result of closed facilities and the uncertain timing of their reopenings are.
Government supported businesses, which represented approximately 16% of our consolidated 2019 revenue are not closely tied to the crude oil or public entertainment markets. So contracting activities should be relatively unaffected absent any cobot 19 related delays.
Now turning to our liquidity and balance sheet.
In any environment and especially during this complex time, a top priority is to preserve our liquidity and balance sheet. We are taking decisive action to reduce costs by recycling and restructuring our businesses leaning our operations in this evolving energy environment.
We are currently targeting a reduction of annualized expenses in the range of $125 million to $160 million by the end of 2020 inclusive of $35 million to $40 million of reduced depreciation expense.
Cost reduction actions being taken include.
Efficiency, enabling projects or for some process improvements and rationalizing facilities, which include increasing focus on remote operations to reduce the number of people working offshore the consolidation reduction or elimination of facilities to reduce lease and operating expenses and driving our quality tenants throughout the organization to eliminate.
Non value added cost.
Simply simplification of our operating structure, we've recently and we'll continue to take actions to simplify the way in which oceaneering does business by better aligning like for like activities to leverage people assets in facilities.
Reform services and provide products in a more efficient way.
Actions taken to date include permanent head count reductions and elimination of management layer.
Compensation reductions.
The base salaries for our senior leadership have been reduced by 15% for myself, 10% for all of our senior Vice president positions and 7.5% for our vice President positions.
In addition, we've reduced the company match on our four one k. plan by 50%.
And reduce the expected payouts under our short term and long term incentive plans.
Other cost reduction activities being undertaken include implementing supply chain savings, where we can bundle purchases across business lines to achieve lower pricing and renegotiate contracts with vendors in light of current market conditions. We're also taking steps to eliminate nonproductive assets, which will benefit us with lower inventories and lower carrying costs.
Yes.
In addition to these categories. We also expect to see a benefit from an estimated $35 million to $40 million reduction in depreciation costs as compared to 2019.
Although this is a noncash expense it is worthy of highlighting because it will benefit our operating performance and position us to return to profitability sooner.
Since launching this effort approximately $70 million of annualized cost reductions have been initiated and thats net of depreciation expense additional savings are expected to be achieved throughout the remainder of the year with the majority occurring in the second and third quarter.
We expect the cash costs associated with these actions to be around $15 million.
Now before I wrap up the call.
Marvin Migura, who is well known to many of you will be retiring promotion hearing at the end of May.
And I wanted to offer a special thank you to him before he starts is next chapter.
Over the past 25 years Marvin has served as our Chief Financial Officer exempt executive Vice President overseeing all of Oceaneering support functions and over the past several years as a strategic advisor to me and our executive management team.
Did you know that Marvin is not missed one quarterly earnings calls during his 25 years.
Marvin's extensive knowledge of the company.
His ability to focus on the critical issues at hands Cantor. Please.
Common sense business guidance and sense of humor have made him an invaluable asset oceaneering.
Best wishes retirement Marvin.
Will be missed.
So in summary.
Im pleased with our first quarter results I believe these results show that Oceaneering had successfully adapted to the market realities in place at the beginning of the quarter.
Clearly significant changes have occurred since then that of drastically changed to the anticipated anticipated activity and pricing for our services and products moving forward.
While there will undoubtedly be many challenges presented as a result of these new realities I'm confident that with the actions already underway.
Quality of our services and products in the health of our balance sheet, we will be successful in adapting and succeeding in this changing market environment.
We appreciate everyone's continued interest in oceaneering and will now be happy to take any questions you may have.
Hi.
Marcello we open this up request.
Your first question comes from the line Sean Megan Your line is open.
Sporting good morning, good morning.
So I understood on the difficulty of giving formal guidance at this point.
So we just maybe go through some more granularity around how you're seeing some these different issues impacted businesses AMAG, probably I want to focus mostly on rvs by the obviously theres impact across each of the businesses. So.
In terms of expectations around customer decision, making in the near term folks who are trying to shed costs anything thats not nailed down they're trying to take out and then second side I would also say.
Cover 19 related issues, how you're managing through those both on supply chain as well as in the.
In the field from that any perspective theres. Some some critical pieces I would love to hear some more granularity around those issue how you see them to provide some context for us in the next couple of quarters.
Yes, I mean, Sean I guess the challenge here has been.
We do see the year, you're watching the weekly rig count the rig counts dropped pretty significantly.
Since since the beginning of April so we're we're very cautious that we're not sure exactly what what's happened I mean, we've had operators that the so called us when we can say we're going to we're now to discontinue this project and then they get a little relief on moving people in and out of some of the some of the countries, where we work and they pick it up the next week, so it's really hard to get.
Clear picture, what's going on but but I will say youre coming off a quarter with.
Good RV utilization, we we think market share will persist.
Even as rigs drops so.
Just I think the best thing I can tell you is keep an eye and what's going on with rigs and and we are likely to follow that can count pretty pretty closely but us business I don't think will deviate much from the way it's paralleled the rig business in the past.
We may see a little more.
Brownfield activity on the vessels, where people are doing some of the remedial work that they continue to do to keep that production going even if big projects already get stalled out because people don't want to make that capital expense.
Our customers was urban money for those who are still paying a dividend or or just really challenged to come up with the cash do some of the big project. So I think those those things are the things to watch that's the best thing I can tell you on granularity and then as far as products go down same story right I think what we're seeing is we're seeing more delay.
As the cancellations. So we do see things where people would like to slow down a little bit.
But it but even that in the manufactured products business hasn't been tremendous yet, but they will stay tuned I think everybody still getting their feet under them and making those decisions.
Well. Thanks, I appreciate that detailed in the context it's helpful.
So then.
Thank you about cost out initiative looking at your cost structure.
As you've gone through this process have you done much competitive analysis looking at what your fixed cost structure looks like relative to maybe direct comps or even just other public companies in.
In your sphere.
How does your cost ratio will compare compared to peers how.
And how well it look once you've completed this rate latest round I guess I'm trying to guess sense for.
Re sizing the business relative to.
To make to make yourself more competitive from a margin and returns perspective on a medium term basis.
Like to learn more about that process, then and how you come to this level of costs as being sufficient at this stage.
Sure and we so we did benchmark against competitors, Sean and not just at sort of the just the DNA level, we actually drill down in said, what's our and what's our head count can cost to serve and HR and in all different groups. So that we get that seem to get that focus on those places where sometimes you don't always know exactly where you.
We are being noncompetitive, so we try to get that level of granularity. So that we can attack those things effectively so I think what what I would what I would guide to is.
I believe that the numbers, we gave our in that range of we ranged from anywhere.
At midpoint, we would be at midpoint and if we can hit the high end of those savings were going to be we're going to be better that better than.
The peers and and I would say that we opened a pretty wide aperture peers just to make sure that we were comparing against not just those that are close to us but.
Some some some best in class industrials as well. So we're we're shooting for US I think a pretty aggressive target when we get to the high end to that range and again as the market changes and where perhaps a smaller company as it feels like right now.
Those that'll that'll be more aggressive target so we're going to keep working on there.
Understood Alright, thanks for the feedback.
Your next question comes from the line of George orally.
Right.
The H. and company your line is open.
Foreign George putting on learning guys are real.
Good.
The the.
First place I wanted to start off with you guys talk a little bit about.
Incremental asset rationalization, you've already done some of that and there were some asset impairments and write offs, which is completely understandable in this environment, what why and I just wanted to better understand how that impacts DDNA going forward and then just kind of what types of long lived.
Assets fell in that right up for impairment bucket.
Yes ill take that one.
The the ongoing kind of DNA I'd say.
Incrementally as can be another million and a half a quarter.
Yes.
Reduction and depreciation.
When I look at what kind of assets similar was shallow water vessels that we had no. It took some impairments on was the primary component.
So a lot of this was not assets that were actually being written off business assets.
Had impaired values going forward.
Okay that that's very helpful. And then and if you think about that Geo markets across we'll let you work today and kind of your global presence.
I have a two pronged question.
Which offshore deepwater theater is do you expect share the most resilient and in 2020 and part of that question is.
Where would activity naturally hold up at crude oil prices were adding over a low level and some of that is also where are you seeing the biggest impacts driven by just co that any inability to get shift change is done efficiently and then Conversely, which offshore Geo markets have you seen the greatest impact from both.
Crude oil price and Cove at and where do you expect to hit unless it incremental weakness as 2020 per vessel. So apologies for multiple questions rolled into one, but it's all kind of tied together.
Wow, George I wish I could give you like really good clarity bigger, but as soon as I started talking about all the moving pieces, it's going to get really money, but.
I will I will say that.
Norway, Norway has just kept quick as one of the places that we saw great opportunities and already great activity there.
So that's that's kind of a high point and part of that is number one Norway's just kind of longer term focus so much of the work is done by by Ecuador, There and so that was that was one of those places where we saw less disruption of course, we've got a we've got a very indigenous workforce in Norway. So we didnt have to worry about getting people in and out so really it was just about.
Really specifically if there was a conservative event on a on a platform like we saw some of that happening during the past quarter.
But that was minor west Africa has been more challenging because you use you just have less indigenous workforce there even though we think we've done a great job, we still have people it need rotate into now they go through long quarantine periods. It slows things down we've been able to maintain business continuity, but it's at it.
It's set up.
Think of more labor intensive process, because you've got so much inefficiency as people have to go through those quarantine periods.
But when I when I compare and contrast, these places on one of things you also says there's ongoing commitments with the local governments that sometimes those those commitments seem to be driving projects ahead to where the operators can you.
Quite as quickly pull up stakes and moved to the next thing or just conserve cash flow through of those commitments. So while some of those places are more challenging to work. They also have a little more inertia in the projects and so Gulf of Mexico.
We've been able to keep the vessels our vessels going be evolutions been able to.
Keep doing work and so we've had good business continuity there, but then I think there the operators in the Gulf of Mexico are more in control of their own budgets, so they're able to slowdown in speed up and do things without as much other than their partner agreements not as much not as much impediment I guess to to make in their own decisions. So.
Challenging question to answer, but right now I think it's still playing out, but we see goods and we see goods things happened a lot of places one of the nice things as we haven't seen a big we haven't seen a big impairment in offshore wind activity in the North sea. So thats been that's been fairly good other than the small hang ups with trying to move people around during.
I hope it but.
I'm just really for us it's been great because we've been.
We are listed is essential in almost all the work we do even some of the entertainment work and so we've been able to we've been able to keep busy we havent seen really seem very few work stoppages.
Had.
A shift that that wasn't able to come to work while ever deciding what the right procedures, where but we are able to adopt new ways of working and keep people going to work and keep our customers work and so thats been great.
Okay, and George I want to add one component I kind of settled the short on my answer as far as the asset impairments that we took in the quarter. We also had a fair amount those in our subsea products segment, most of which we call within our subsea distribution, which is umbilicals and hardware related.
So we took some impairment issues related to the facilities in Brazil, Angola and enroll side.
So that would be the other component.
Okay. That's helpful. I noticed that 50 Fourish million dollar impairment that caught my attention helps to kind of square the circle there yet.
I appreciate.
The color from you guys.
Thanks George.
Your next question comes from the line of Marc Bianchi from Cowen Your line is open.
Hey, Thanks, a lot I.
I guess, just following up to some of the market commentary and questions about kind of how things could progress.
I think what I'm hearing here is that maybe RV.
Probably has maybe the most downside and then.
AD Tech would have the lease down side and.
The other the other segments with the maybe somewhere in between with.
Perhaps products, maybe being closer towards the RV side and then the other couple of segments closer towards the AD Tech side is that is that as you see it may be a fair way to think about it or is there anything you'd you'd correct in that and that summary, so.
Mark I think I think you've got them, we just got to break up the mix a little bit.
Government is probably the least effective so you take add split AD Tech because government is probably the least affected entertainment is the most affected I believe thats not a that's on a probably isn't going to maybe.
Because those marks or Jay just your shutdown, we couldn't get into do work.
For the completing vehicles that we happen to be working on in our shops.
They're just they're just really shutdown now longer term the made we expect them to pick up and they'll build find their way to serve customers again, we might get to participate in some of the I would say some of the technology or ingenuity they'll use to make its safe to get people back in the parks. So we were hoping to participate with that but.
But there definitely the hardest hit.
Weve in the past, we've seen asset integrity get pretty hard hit because it seems like a lot of that is manageable costs for our customers that they can they can postpone some of that activity and push it out so they tend to see volume reductions happen pretty quickly our OE gets a little bit. It gets the same kind of thing, but if they get a little.
More angle or because you got to finish you got to finished drilling the well or or maybe they just want to get too.
Third part in the campaign before they stop so they get a little more run over and then you're right products runs long because you're working on you're working on orders that have already been placed.
We came out of the year with a pretty good amount of backlog, so we'll get to work through that but.
But we've seen this phase before right. We've seen we've seen it where say survey in RMBS kind of if the first downturn.
Normal oil cycle and the product backlog plays out Thats fine you get you get coverage for another year, but but following that when the orders telecom them. Then when rvs are picking back up then we start to see that low backlog or or low absorption in the manufacturing side, but I think you've got it I would just look at the finer points of AD.
Second and then maybe the star business, the service and rental business, which which is really based on.
What the customers want to do in the because a lot of that as well remediation the light well intervention stuff like that that.
If they've got a well it shut in that's an important production.
That could happen almost any time so.
Okay.
That's helpful. Thanks for that.
Yes, yes.
In terms of the operating leverage here.
You guys have the cost cuts, which should dampen kind of the decremental margin effect somewhat if I look back to 15, and 16 and I know things are choppy from quarter to quarter, but just looking back to to those years. The annual Decrementals that you had were kind of in the low to mid 30% range on an EBITDA basis.
Should we expect you guys to do better than that now just given this cost cutting program because I don't remember that we had a major cost cutting program like less than the prior downturn, but but maybe that.
Recalling things.
Ron There Mark I'd say I think it depends on how low it goes right I mean that because they were starting from a lower point, but on the other hand, you can also take into account that I think we've got we've got more of a four support on price because we've been pillar our customers are understanding that we never got any any price relief.
In the 18, and 19 time really nothing meaningful so I don't think we'll see the same pressure is that we saw in those years.
And yet we have definitely done better at sort of the DNA in the structural parts. So I think that will be working toward advantage as well, but there is there there will become a point of activity drops to to some of that some of the lower end use of of the lower ends of the ranges that we've been hearing it'll be it'll be hard to fight the decrementals.
If we get that quote.
Yep makes sense right. Thanks, a lot for the comments.
Your next question comes from the line of Scott Gruber from Citigroup. Your line is open.
Hey, good morning, guys.
Good morning, guys. This is this adjustment has got to associate honest, yes.
Hey, just.
So if.
Did you guys can help me kind of.
I understand that the new cost out program.
Does that 125 to 160 guide include the cost savings from that were implemented and for Q.
18, as well as I want you Tony is that that 79.
Yes, that's part of it.
Okay, how much of that.
The cost savings has been realized from those previous programs.
That have been implemented.
I would say is predominately the depreciation that was.
Taking into account in Q4 last year.
Okay, we haven't announced it needs to be programs, it's been kind of fluid process.
So.
Most of the non depreciation ones, we started some other with asset integrity, the rod alluded to on the call last time.
But it's just been fluid process from.
The whole Q4 forward.
Okay.
Appreciate that and.
And then you guys said that the.
Volume related cost reductions are not included in that guide.
But kind of given the current market.
Activity, how much additional savings could you see from the variable side.
Well I mean, that's going to be to spend on the volume. So if I do you don't happen.
With.
Umbilicals are hardware.
Being a key component and we see a significant reduction.
And activity there.
So that would be a tremendous.
That's the savings we don't want to see also.
So thats going to impact topline as well.
Okay and then just lastly from me is.
Your capex looks like it's going to be kind of on a run rate basis on nine on a quarter for the remainder of this year just kind of wondering if that levels considered sufis sufficient maintenance level.
Kind of if we move into.
2020 wind with it kind of the continued activity lag is that kind of a run rate basis, we can kind of model or expect for for next year as well.
I think theres still a little bit of growth Capex, that's being completed here in Q2 associated with the.
Drillpipe riser contract for Brazil.
So I would say that the nine is not going to be amortized equally amongst the three quarters, it'll probably be a little bit more heavy in Q2.
As a net equipment is about to go on higher this quarter.
So.
Q2 will have a heavier capex demand as we complete those assets and then it will be lighter in the back half the year.
And that will probably be to more the run rate from a maintenance capex that you could look at modeling for 21.
Okay. Appreciate thats all for me thanks.
Thanks.
Your next question comes from the line of Kurt Hallead from RBC. Your line is open.
Hey, good good morning, everybody in and hope all your family Curtailing wealth.
Morning.
Good morning, and Marvin Congrats on your retirements.
All the best.
Yes.
Welcome.
So so hey, Jim just hoping that you'd be able to get to help me with with some some of the logic that I've tried to run with all the information you guys provided.
In the press release last side and on the conference call today, but.
Take all the components you provided in terms of the cost reduction.
Capex reductions and tax dynamics so on.
If I take all those midpoint of all those components I think that adds up to around $18 million of.
The positive cash.
Contribution level on a full year basis, just just wanted to double check to make sure by my math kind of matched up pretty closely with but the math you provided.
So far.
Your next question comes from the line of Mikes.
Well what happened there pick up.
So.
[laughter].
Well I guess I didn't think it was that type of a question that you needed.
[laughter].
Yes.
No.
Although component that up to about $80 million at the midpoint is that about right.
Taking the.
Amount from the cares AG.
Yes, I took that into account kind of offset your cash tax.
I would just be took the depreciation change and concluded that in that dynamic. So took your opex or capex. Your cash tax you cares act in the depreciation pick the midpoint of all that you had that up that's about 80 million Bucks is why make sure is understanding dynamic correctly as you thought about free cash flow for the year.
Uh huh.
Impact to.
Depreciation on free cash flow.
Well again, you can I get back you get back that out seaborne maybe in the 40 million up $50 million range right something like that.
Yes, I agree that are a great all right. Thanks, and then just curious on last conference call. You got suggested maybe working capital contribution of $5 million to $10 million for 2020, I know a lot has changed since that point in time, but you did indicate in your commentary you did expect the positive contribution from working cap.
But all in 2020 to what magnitude you think that that working capital contribution could be.
I don't think we're prepared to give a range when we do still see have been positive.
And.
Unfortunately, a lot of its going to be.
No generating cash through liquidation of receivables.
Okay. That's fair and then just this one last thing so let's just say, we if were to take a revenue decline.
Matt number doesnt really really matter.
Well I'd, just say revenues go down by 20%.
On a broad brush you guys indicated that a 30% EBITDA decrement on that per Mark's earlier question.
Can be a reasonable starting point to kind of think about the impact on profitability.
And then we I would assuming we'd be adding back youre your operating expense savings.
Which again at the midpoint would be on an annualized run rate of about 100 hundred million dollars. So as I think about the exit on on EBITDA and is the logic of that process correct. So the revenue declined the decremental margin then add back the operating expense savings kind of look at that on an exit basis for 2020 is that.
At a fair way to look at it.
Okay.
No.
Yes, I'm trying to follow all of that.
They say they revenues declined by 100 million. Your EBITDA will go down by 31, right and then you got cost savings on top of that which is 100 by say basically at that 100 million onto that near your EBITDA is really doesn't go down by 30 million to go down by something last because of the cost savings. That's all I'm trying to get at just trying to understand biologic on and guys I think.
Right yes.
Yes.
Okay.
No.
Sorry, sorry about making it more complicated than need to date all right. That's it that's been on my end thanks guys.
Thanks, Chris.
Your next question comes from the line of Mikes developed from Bank of America. Your line is open.
Hey, Thanks appreciate appreciate wanting those coming next also.
So as we kind of think through how I'm, how the mark to market sort of develops and I know, it's pretty uncertain at this time.
But if we just kind of think of a normal cycle.
Can you just walk us through Aimar in a normal cyclical environment and then.
Kind of in an environment, where where operators are shutting in wells versus an environment, where there where they're bringing them back on.
I think yeah, I think you've hit on the important thing I think the it'll be interesting to see if this plays out could be a normal so because I think it a normal cycle when we don't see well getting shut in we just see people managing the spend.
We initially would see sort of a decline just step back, but the knee jerk reaction of.
Stop everything and we see a.
Fall off in activity and the women and then when they decide that they've kind of re stabilizes the company at whatever they the new oil prices. Then it's one of the first thing is it comes back because how you're talking about getting more production from from infrastructure. That's already in place. So it's generally the cheapest next barrel I think I think it it does pretty.
Well.
What could happen in this case.
Is it could be I would say the more extreme meeting.
When you start shutting in wells when you go to restart those wells it there could be there can be additional work to do right.
So I think when we think about especially some of the hydraulic work we do some of the flow line hydrate remediation and things like that I think you could actually see a bigger bow wave of that sort of activity that.
It kicks in when you try to restart wells. So I think it's it's a probably exaggerated version of what a normal cycle would be.
Thats helpful. It makes sense and then I'm, sorry, I had to help on a little late did you all walk through kind of how the cost cuts.
Focus on a segment or is it should we just really thinking. This is this is cutting across the board.
Yes, I think again I think you.
Think of it is more broad brush, Mike it's because it really is I mean, we we've gone through a pretty significant order redesign.
You know we've got we're like we mentioned in the call. We're combining like with like so trying to trend allocate those to one or the other it's going to be less meaningful and just looking at overall once again to be because where you for example, how much you allocate each group when you move three groups into the same facility. So those those kinds of things better looked better from.
From a top level.
That's great. Thanks, a lot guys.
Your next question comes from the line of Blake Gendron from Wolfe Research. Your line is open.
Thanks, very much good morning, guys. Appreciate the comments around the covenant by the way I missed that.
My first question is on the Aro these kind of dig in there can you just update us on sort of the commerciale that's on the.
The rigs followed side.
I would imagine there's contractual components of that and it's going to be a little bit stick here because floaters.
Kind of like what we saw in 15 should be bridged at least over the near term but.
But if we do see rig terminations kind of at a lower oil environment, how does that impact your R&D business.
Are there is there any sort of termination payment component to that.
And then kind of following on that that that question I'm wondering what you can do in this downturn as offshore rigs potentially or stack to add to gain share.
In the back end of this downturn.
As as rigs go back to work thanks.
So great Blake.
I don't know Theres no there's no magic in termination fees or anything like that for us I mean really it's going to be when those rigs get term to they quit working or even when they are contracted and they quit working.
It's that's that's revenue loss for US working days lost so it's up what you just kind of watch the working rig count and you'll know how it's affecting that that drill support side of our RV business.
The upside to to market share and everything else is that we are we're really leveraging and we've been working really hard on remote operations de Manning.
Some of the some of that.
The the hybrid RBS, a we're using some of the resident argues that we're using that cash number one reduce carbon footprint because you don't have to have a vessel.
To support down, but also because we can get we'd be operating those from a few super centers around the world and get people off the rigs so that I mean, we've already seen that get more interest than it ever has before as people start to realize moving people is hard to do especially in a situation like this so being able to to have.
The people not have to travel have the machines moving around or the machines already in place I think that's what we're going have to leverage and it's also why if you look at some of the some of the Newbuild Capex you know not the maintenance capex for the new build that's where we're going to continue to put money is some of that automation resident vehicle those kinds.
Things that we believe our our pertinent to the so the new oilfield not necessarily.
Hey, we've always done things in the past so we're going to we're going to help the lean into kind of leading edge of of what technology is going to look like on the other side of this and I think that steps the flooding.
That's a that's helpful perspective.
In advanced Tech you gave us a good run down of the government versus the entertainment business, it's been a focus of R&D spend.
To the degree the guys focus on that specific on the software side wondering if theres any sort of change and focus.
Just given some of the uncertainty with.
Just oil and gas, but some of the some of the out the markets globally.
You can do you want to continuing to kind of.
R&D spend toward that part of the business.
More so now just given that maybe it's a little bit.
More resilient in the current commodity type.
Oh, yes, and I would say that even though.
From a technology standpoint, even though entertainment's challenged right now if you look the flip side of it that the software to be able to control systems. All the things we do to make those those ride systems work for entertainment. That's all directly applicable. It's the same stuff we do in the Agb business. So so continuing to invest in that it's going to be I think there again.
Just like I said about automation in RMBS automation in the in the factories and everywhere elsewhere, and we're going to be able to reduce the number of people. After work elbowed elbow in a lot of these places by by using some of the vehicle technology. We have I think thats the demand for that's going to go up so we have to continue to invest that is.
I really like what you said around resiliency I think it's very much the case for for those two businesses.
Got it thanks, a lot guys I'll turn it back.
It's like.
Your next question comes from the line of David Smith from Ken Energy James Your line is open.
Hi, Good morning, this last one Heikkinen energy.
Aboard.
Wanted to ask.
Given your significant cash balance and expectation of free cash flow for the year I'm curious how you view the opportunity to take advantage of the wide discounts that your your debt is trading at.
So I mean I'll jump in first and I'll, let Alan finished the thought but but we are very much focused on opportunities. There I think we've talked about how use of cash you shifted in and out looking at our dad is really why we would carry those those cash balances.
So far.
Just trying to you during during this time dislocation we've been trying to look at our best options because.
Our bonds are pretty thinly traded so whether or not we could make a big movement buyback bonds wasn't entirely clear to us. So we were evaluating options, but I think we see it very much the way you Alan would you add anything.
No I think I think you captured it quite well there Rod I think is one that you know.
Should we do anything we'll report on it when required.
Appreciate it and I was going to ask if you're getting more traction with remote RV piling that sounds like you are.
Just wanted to make sure I understood.
Getting real interest and remote pilot in cargo and support.
We can we can do it for some of the drilling support but really platform work and things like that where we've got.
Where we got the RV station for I would call. It more intermittent work, that's probably where we will see it most often and that's where we can have a you know we can have that opportunity to to be able to launch in our Ob. That's that's not as as frequently used as it would be.
On a vessel, especially but on a drilling rig as well.
Great. Thank you very much.
Yes, I think that.
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Again, if you like to ask a question. Please press star and the number one on your telephone keypad. Your next question comes from the line of Ian Macpherson from Citi. Your line is open.
Thanks, Good morning.
Right I wanted to morning, how you how you feel this most recent.
The crisis has changed the calculus one.
Industrywide M&A.
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Honestly from our seats, we see the need for the industry to consolidate more and rationalize overhead et cetera, and from your seat I know that no one likes to crystallize their value it drop prices, but.
How do you think it's going to unfolding here and what do you think.
The opportunity looks like for a for oceaneering to participate.
You know why I think that is absolutely true there's there's no denying that as is.
All of the.
Service company sort of our peer group.
Have gotten smaller and you know the opportunity set the the activity levels. It if we see a longer term suppression activity level. It. It just it just makes good sense right that to try to find.
To try to find those partnerships and those combinations challenge you nailed that I mean, there's there's two challenges number one you want to find things that were.
Like for like is there. So you get you give the synergy you don't just get the DNA.
And so looking for those things and then trying to straight on.
We're going to have to stabilize a little bit because.
I I would say it takes a while for US all to believe that this is this is what our value is and I mean, it's been a tremendous shock on share price since the beginning so everybody that's got to settle in and and not not just the realization for ourselves what it is but also that we believe that the relative values.
Settled out so that those combinations can happen, but I think it's just it's a matter where we have to get the timing right.
Tell you from an oceaneering standpoint, just when we look at that.
I think the first order business is to do exactly what we're doing if you. If you want to be for example, if you want to be a consolidator you have to prove that you. You're you can do all the things it takes to be a good consolidator and that's exactly what we're doing today right now is combining our own like for like rationalizing our facilities being really good at make leasing.
He has worked together having that the functions that work across the organization. They can serve all different businesses.
With a with a centralized function I think those things are what make kind of give you the right.
To be out there in the market looking to do some of those deals in the future. So even though we're waiting for some of that other stuff I think I think we are definitely preparing the company.
To be able to do that.
When we when when everybody's ready to go.
Got it thank you Rob and then.
Alan add a follow up for you we've already kind of tackled to some degree the the guidance questions.
But just on free cash flow for the year, obviously, starting at a deficit in Q1.
We assume I assume any way that EBITDA was probably degrading.
Sequentially through the year, So we would look for probably a good.
Free cash flow plant and the second quarter, probably with some working capital to really release to help de risk that target of free cash flow neutral or positive for the year is that a fair assumption that Q2 should be.
Pretty significant reversal of the cash movement that we saw in Q1.
No I think it's going to be more Q3 Q4.
Okay. So I think Q2 as I alluded to.
We will have heavier capex in Q2 than we do in the back half the year, we anticipate getting some of that cash tax refund in the back half the year as well.
And with lower levels of revenue, we should be able to generate more from our balance sheet in the back half the year as well.
Revenue hasn't dropped precipitously yet so.
Probably the back half the year story.
Okay. Thanks for that clarification. Thanks, all the answer say guys.
Yes. Thanks.
There's no other questions at this time I'll turn the call back over to the presenters.
Thanks were so well since there are no other questions I'd like to wrap up by thanking everybody for joining the call and this concludes our first quarter 2020 conference call. Thank you everyone.
This concludes today's conference call you may now disconnect.
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