Q2 2020 Oceaneering International Inc Earnings Call
[music].
My name is magazine and I will be your conference operator, I would like to welcome everyone to Oceaneering second quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period with that I'll now turn the call over to Mark Peterson, Oceaneerings, Vice President corporate development and Investor relation.
Yes.
Thanks, Megan good morning, and welcome to Oceaneering second quarter 2020 results Conference call. Today's call is being webcast. A replay will be available on oceaneerings 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 in industry conditions are forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 99.
The five our comments today also include non-GAAP financial measures additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our second quarter press release, we welcome your questions. After the prepared statements I will now turn the call over to Rod.
Good morning, everybody. Thanks for joining the call today, so before I start with the prepared remarks I wanted to take time for thank you to our oceaneering employees, our customers and our fellow offshore service providers.
Coming together there with the way they have in the second quarter to work safely and then perhaps in ways that we may not have previously envisioned.
Hi. This is the spirit that's made this industry great and together, we are going to continue to make a difference and make the industry veteran safer than ever before so thanks again everybody.
Not in my prepared remarks today I'll review the details of our second quarter 2020 results I'll provide you with the general outlook for the second half of 2020, and I'll give you an update on our expense reduction activities after that ill make some closing remarks and open the call to your questions.
So for our second quarter summary results considering all the uncertainty surrounding the crude oil markets and the Kobin 19 pandemic, we were satisfied with our adjusted operating results for the quarter, we generated adjusted earnings before interest taxes, depreciation and amortization or adjusted EBITDA of $40.5 million.
Exceeding consensus estimates and we generated $26.9 million of free cash flow.
These positive results were partially attributable to our actions to substantially reduce structural costs in light of an expected continuation of lower demand for services and products.
Positive effect of these cost reductions as reflected in our 9% consolidated adjusted EBITDA margin for the second quarter 2020.
Which declined by only 14 basis points as compared to the first quarter 2020, Despite a 20% decrease in revenue.
I'm also happy to say that these benefits have been widespread with each of our operating segments, except asset integrity, generally maintaining or increasing their EBITDA margins during the second quarter as compared to the first quarter.
As expected compared to the first quarter 2020, the aggregate results of our energy segments declined during the second quarter 2020. However, this decline was partially offset by improved performance in our non energy segment advanced technologies and lower unallocated expenses.
We did experience some operational disruptions and delays due to covert 19 during the second quarter, but the safety protocols that we and the industry put into place in response to the pandemic limited impacts to our employees and our customers.
Sequentially consolidated adjusted operating results declined by $4.4 million and each of our operating segments, except asset integrity generated positive adjusted operating results in EBITDA.
Our second quarter, adjusted EBITDA of $40.5 million exceeded consensus estimates and we generated $26.9 million of free cash flow, we had $334 million of cash and cash equivalents at quarter end.
Now, let's look at our business operations by segment for the second quarter compared to the first quarter.
We will be adjusted EBITDA margin remained relatively unchanged at 31% during the second quarter as compared to 32% achieved during the first quarter 2020.
Sequentially revenue declined by 12% principally due to a 9% decrease in RMB days on higher and a 3% quarterly decline in average RV revenue per day on higher.
Decline in revenue per day on higher resulted from fewer mobilizations and increased standby days and revenue all of which are included in the calculation.
Pricing concessions during the second quarter were not noteworthy as we continued to progress our expense reduction initiatives.
As a result, and as expected RMB adjusted operating performance decreased declining by $2.5 million. This decrease resulted from fewer working drilling rigs, which yielded lower days on higher for our drill support services that were only slightly offset by a marginal seasonal increase in days on higher per vessel.
Okay services.
Our fleet used during the quarter was 64% in drill support and 36% per vessel based activity.
Compared to 68% and 32% respectively for the first quarter.
Fleet utilization decreased to 59% from 65% in the prior quarter due to the decrease in based on higher.
At the end of June 2020, RV fleet size remained at 250 vehicles. The same as it was at the end of March 2020.
Our drill support market share at the end of June was 62% with RBS on 86 of the 139 floating rigs under contract.
This compares to our first quarter market share of 61% of the 159 floating rigs contracted at the end of March.
During the quarter, our customers adapted quickly to the lower commodity price environment with the number of working floating rigs falling from an average of approximately 121 for the first quarter of 2022, approximately 96 for the second quarter 2028, 21% decrease.
Turning to subsea products during the second quarter adjusted operating results declined by $5.3 million on a 33% decrease in revenues as compared to the first quarter.
Persistent cost reduction efforts helped us to achieve an adjusted operating margin consistent with the margin generated in the first quarter of 2020.
Revenue in our manufactured products business was impacted by the delayed receded materials customer driven project delays and decrease working hours due to covert 19.
Revenue in our service and rental businesses declined slightly due to decreased activity levels I do want to highlight that during the quarter. We performed our first the drill pipe riser or DPR work scope in Brazil pursuant to our previously announced four year services contract.
Our subsea products backlog at June Thirtyth, 2019 was $486 million compared to our March 31 to 2020 backlog of $528 million.
As expected there were fewer bookings during the second quarter as many of our customers delayed investment decisions due to the uncertainties regarding oil prices and potential Covance 19 related operating risks revenue replacement during the quarter was 67% and our book to Bill ratio for the trailing 12 months was 0.83.
Sequentially, some see projects quarterly adjusted operating results improved $1.3 million on an 8% reduction in revenues revenue declined due to decreased customer activity customers were quick to respond to falling oil prices by reducing the amount of call out inspection maintenance and repair or aimar work.
We were pleased that adjusted operating results improved as a result of better project execution and ongoing cost reduction activity.
Asset integrity that adjusted operating results declined sequentially on lower revenue and as a result of nonrecurring costs on certain completed projects.
For our non energy segment advanced technologies second quarter, adjusted operating results improved $1.7 million sequentially due to solid performance of our government businesses over 19 continues to adversely affect our commercial businesses. However cost reduction measures implemented during the first quarter 2020 limited the financial impact.
On our second quarter 2020 results.
Unallocated expenses for the quarter were sequentially lower as the return on market based assets held in the trust for the benefit of certain post retirement obligations improved as compared to the first quarter. Additionally, we had reduced we had reduced information technology cost.
During the quarter.
And now for our outlook for the second half and full year 2020.
Although we are encouraged by our second quarter 2020 results uncertainty remains for the rest of 2020. Many the markets. We serve will likely continue to be impacted by the effects of and associated responses to cope with 19 as well as potential reductions in customer spending as a consequence of the volatility in the macro drivers surrounding oil and gas commodity prices.
Yes.
Actually we expect continued softness in the demand for services and products within our energy businesses. Additionally, code 19 challenges will potentially affect the timing of our light well intervention project in Angola, and near term demand in our entertainment ride business.
On a positive note we do fruit projected good performance from our government businesses, which are not driven by commodity prices and we expect our manufactured products backlog to support good activity levels through the remainder of 2020.
Given customer spending uncertainty and potential Kobin 19 challenges, we're not providing segment financial guidance for the third quarter second half of 2020, we affirm that unallocated expenses are forecast to be in the high $20 million range per quarter for the remainder of 2020.
For the full year 2020, we affirm our expectation to generate positive free cash flow for the year capital expenditure guidance in the range of $45 million to $65 million, our cash tax payments guidance in the range of $30 million to $35 million and our expectation of cares Act tax refunds guidance in the range of 60 million.
And to $34 million.
And now for an update on our expense reduction initiatives.
In our first quarter 2020 earnings release and conference call, we outlined our plan for a targeted 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 as a reminder, we classified these efforts into.
For general categories as follows efficiency, enabling projects, which so many described this process improvements and rationalizing facilities simplification of our operating structure compensation reductions and other cost reduction activities, including supply chain savings and the elimination of nonproductive assets.
We classify the majority of these cost reductions to be structural in nature, and therefore do not expect them to return when activity picks up.
These cost reduction efforts are progressing well and we estimate that since launching these efforts approximately $85 million of annualized cost reductions have been initiated with additional savings expected to be achieved throughout the remainder of the year.
I'd like to emphasize that this $85 million does not include the $35 million to $40 million introduce depreciation expense that we announced last quarter. So when you add these together we have reached $125 million for the lower end of our range.
We continue to expect the cash costs associated with these actions to approximate $50 million in 2020.
In summary, considering all the challenges we face going into the second quarter. We're pleased with our results much work remains to be done of course, but I'm very proud of how the oceaneering team has responded to the realities of the markets we serve.
Preserving our liquidity and balance sheet remains a high priority in the current environment, we expect to generate positive free cash flow for the full year 2020 based on the actions, we're taking the drive meaningful customer interactions to enable our customers to adapt to new ways of working and achieve their de carbonization goals through Digitization automation.
And remote operations.
We continue to focus on our quality tenants expand our targeted cost reductions reduced capital spending lower cash taxes, and our expectation for cares Act tax refunds.
We appreciate everyone's continued interest in oceaneering and will now be happy to take any questions you may have.
At this time, we would like to take any questions. You may have to ask a question. Please press star one on your telephone keypad.
Our first question is from Sean Meakim with JP Morgan Your line is open.
Hey, good morning, Sean.
Good morning.
So thank you for the clarification on the DNA portion of the cost out program versus the.
$85 million level to date that was in the release I think thats that's helpful.
And then maybe just dive in a little more into the.
The cost that program just what are the major buckets that are last to get to to your current.
Your current target and then.
How much what else do you see as out there were still in a challenging environment for offshore for the next six quarters, which I think it's a reasonable chance thats the case.
One other incremental opportunities are you evaluating pursuing how do we think about the next opportunity set besides what you laid out yourself are.
Great John with when you ask kind of where the major buckets are it is fair to say that they are quite evenly distributed across all of our segments. So everybody and I think thats.
Sales in the second quarter were sort of the margin maintenance.
This is evenly spread maybe maybe there's a little less in the in the government side of AD Tech just because we actually see some opportunities there and that that strength came through this quarter as well. So we havent been as aggressive there because theres actually good bentek bid activity. There so maybe a little less so there, but but the rest is.
Is pretty widespread.
When I think about what's left out there to get I.
I think some of it is timing when we a lot of we talked about facilities as one of the examples.
Some of the facilities, while weve, while we've identified them. They just take a while to get to go get because we've got lease terms and and we're looking at Subleases and things like that so so stuff like that is harder to get as opposed to that the the compensation reductions and some of the other things we've done which we're we're sort of the quicker gets and so I think thats.
That's out there when you ask me what what's left.
I think the good news is is that we've still kind of got the tools in our hand, and so if we see continued challenges through the back half of the year or next year. I think were asked already and I would expect it to be pretty targeted around any sort of regional or segment declines we see.
The to places like if we see that you can't you can't afford to stay in a certain region because weve, Jeff just sort of dropped sub scale those actions would need to be taken in and that's actually been a big part of the success, so far as being very surgical around regional operations going in and and looking at that the whole of the activity there.
For oceaneering consolidating a bit as best we can and then making the hard decisions about whether that consolidated aggregated result.
Still still suggests that we should be there. So I think thats stuff continues to happen and Thats right I'd see we'd pivot if we need to do more and again to go capture the rest of what we're after Alan you're not in a little bit you would you add anything.
Ethan Allen ahead, I was I had my notes down here as well and I've said the next thing we're looking at obviously as regional locations facilities. We started in the far east as we announced I think two calls ago.
So its continue to evaluate make certain that we're in the right places it to support the levels of business.
They are sub optimal we're taking a harder look at each of those locations.
And process enablers as well.
I think thats something that team has been working on throughout the organization, whether it's in the back office or whether it's on the front lines. It's how can we do more efficient at what we do where were.
As Roger indicated operational excellence has long been a attended here at oceaneering as well as the quality tenants and we're going to continue to try and focus on that.
Got it. Thank you thats that feedback I think thats that's helpful context.
So then just thinking about the free cash flow guidance.
We'll be great just to maybe unpack what do we think is a good operating free cash flow number so any.
Excluding working capital and tax items, and what that breakeven level as for an operating free cash number and then just wanted to component to that is the capex guidance. So capex guidance is 45 to 65 for 2020.
38 million year to date, so really what you're saying a second half 20 Capex is a range of seven to 27 can you talk about what drives that range there for the back half of the year.
Okay.
I'll start on the Capex side, obviously, the it's going to be more maintenance Capex driven I mean, we as Rob indicated we did get the first system on drill pipe risers successfully working on contract. So we're very pleased with that and then obviously capitalized it so.
Theres very little growth Capex in the back half the year.
Flex up there could be some we have a little bit left on some of the drill pipe riser that we're we're still completing but most of this can be maintenance capex, we're still working on.
The freedom vehicle that we've been highlighting on a couple of calls that is still.
Going to have some capex associated with it as well as maybe a little bit on the liberty or some of the his first type systems kind of the next generation Aro. These that we're continuing to invest in and then the technologies associated with them.
So.
I think the the seven is probably more on just a pure maintenance and if we add some other.
Interest, we could flex it up a little bit if we need to.
So that's kind of go towards the midpoint in the 55 range is kind of where we are guidance.
Looking at free cash flow.
Obviously, you can pull out the cares tax that we've got a $16 million to $34 million.
It is kind of a onetime event. This year that we're looking at so we were uncertain as to the timing of when all of that cash will come in certainly driving forward. This year, but we are subject to what the IRS is.
Ability to get.
All of this process at the same time so.
That part of that could rollover bleed over into 21 as well.
The other components.
Yes.
Standing working capital, which is one of the bigger levers that comes out Sean is.
He is working capital and reduced levels of.
Weve towards the back into the year.
It should free up cash.
Alright fair enough. Thank you.
Yep.
Your next question is from Taylor's Andrew with Jefferies. Your line is open.
Hi, Thank you and good morning, I wanted to ask first on subsea products.
In bookings this quarter were expecting lean low and the revenue was down quite a bit sequentially, but the backlog position is still very healthy and.
Just curious if you can help us think about.
Revenue progression in that segment of at least over the back half of the year.
Just coming out of backlog is there anyway, you can help us think about that.
Yes, when you look at the second quarter Taylor.
It was down a little bit as you noted and a lot of that had due at the timing of receipt of materials coming from some third.
Party suppliers.
We still expect that we will be executed here in the back half of the year.
As more timing then than anything so when I look at the back half the year, it's going to be certainly going back to a more traditional 70, 75% manufactured products and probably 25% to 30% service and rental so we'll be skewed.
More back to a manufactured products.
Revenue stream.
In the back half the years, we put more into the Umbilicals and the backlog there we're going to.
Executing from backlog is.
We talked on the call notes.
Okay and follow up more high level and it on the ultra deepwater activity environment in general I mean, clearly that pandemics created the sort of perfect storm for deepwater activity to supplement over the past few months and.
Do you sort of commodity prices are probably still had lower from here, but it does feel like we probably overcorrected to the downside a bit just given some of the.
Logistical headwinds in place from from 19 and some carriers.
If you think thats, the case as well and if theres any markets out there, where maybe there is fewer rigs that.
I had to go on standby or temporary idling as a result from the pandemic that you might do you have returned to work over the back half the year.
Yes, I'll take that Taylor, Hey, one other thing, but I think youre right and if they really speaks to our hesitance to give guidance because I think theres room for this market to move either direction right.
And and so while.
While we I don't think we see a whole lot of things other than the delay we called out in.
What we called out in the work in Angola, or some of the things that we face in the in the the entertainment business I'm trying to go back to work in China with entertainment vehicles.
We've got upside we've got upside on the government side, So I think.
Our our uncertainty really lies in the market dynamics, which I think everybody is facing right now you call. It well there could be we could have overshot the mark in deepwater in all the examples I would use if we saw effects in Norway for example, where Norway.
They I would say they stumbled for a short time, but now Norway's is working very well.
Brazil, while they've had probably even more disruption because we've had times in way they went out to the rig they found one cobot case, they clear the whole rig they clean everything out they test everybody and they go back to work Theyre down for 10 to 10 days to two two weeks and then they go back to work and we feel like.
The work in Brazil is going to persist so.
Maybe less affected by commodity price and other places. So there are there are places in the world that we think.
Our more resilient.
I think that both both from covert and commodity price. So it's a little bit difficult seres is going to settle out but I I do think that you are onto the right message that.
While it could get worse, we could also see other places resolve and continue to work so.
That's that's what we're that's what we're watching as well.
Great well, thanks and answers.
Yes.
Your next question is from Mikes Anello with Bank of America. Your line is open.
Hey, good morning, everyone.
Good morning.
I was kind of wondering maybe we could we be desktop sort of the discussion around possible that tenders here, maybe maybe the window would never opened before.
Dupont bond prices come down a little bit again recently.
Do you guys think there's another opportunity to move here.
And if not.
How does how do we think about kind of optimal capital structure.
For Oceaneering over the next couple of years, just without with all the cash sitting on balance sheet.
I'll take the first part at least some maybe let Alan take that second one, but but I think yes, we're still leaning in I mean, we're still looking for opportunities.
This our debt that comes it has a 24 maturity, especially we just we just think that if there's a there's a good price on that or theres opportunity to move.
Course, there's a number waste to address that debt but.
And we're getting everything that we can do and again watching the market to see when that opportunity arises so that that could be that could be a good side of the soft market for for us and some others that have the wherewithal back. So I think thats that is definitely on the on the watch so to speak Alan you on talking about.
Structure generally.
Yes, I think really it is is there an opportunity to act thinking the same time, Mitch you know how does the revolver play into the debt structure. How do we have maintained liquidity how do we get beyond the 20 fours.
Certainly looking at each in all of those things over the next.
I will say 24 months with the revolver coming up in January 23, so.
We're very pleased with our liquidity position today, but we recognize we need to.
I will address that.
Too far out.
Where we are today just to make certain that we can.
See an upside in this market. The we do see that we will have to go back to the markets and revenue will return.
We indicated the call knows we we are working on how do we improved the top line not just take cost out social sharing so while we are generating from working capital today I do see down the road. It is something that we need to be able to has the flexibility to address is increasing revenues at the same time so.
Yes.
I think thats one of the key elements we were.
Trying to blend into our overall discussion on debt is looking at the upside that could be coming in the coming years.
So.
Understood.
Yes.
Got it.
Thanks for all that.
Could we just.
I guess.
Point of clarification on the cost cut down I'm, sorry, if you gave it already but the 85 million dollar number was that.
One of a run rate heading into third quarter or is that what you all realize.
Ill.
To your benefit on say call it EBITDA into Q.
It was kind of a quarter and how much of that is there any sort of just carry straight Carol carryover impact into Threeq you that we should we should.
He considering yes. So so when we talk about that Michael we're really talking about the the cost saving an issue we've taken and obviously, we like any other things we do if we if we go and make a Fracing example, a compensation reduction in if the second moca the quarter, we don't realize the full benefit of that so.
So there is different there's varying degrees of that so when we get to 85 that 85 really represents an 85 million dollar annualized cost out for for Oceaneering, how much of that will realize in the quarter kind of depends on when it happens in the quarter and so when you get into the third quarter, we'll start to see more of these things get realized will also.
See more of these things get initialize. So there's a there's a there's a growing wave here of things that things that are happening and we just do we expect that by year end whatever number we come up with weather that 85, if we get to the top of our range, including that the degree stammer depreciation expense.
If we at the top into that range, we do expect that most of that annualized number would be realized in 2021.
Yes.
Perfect. Thanks, a lot.
Your next question is from Ian Macpherson Listen then your line is open.
Thanks, Good morning, Rod now.
On AD Tech.
I mean, my notes may have been.
Screwed up from last quarter, but the performance Q2 is good the better than denied been expecting and recognizing that the government side is.
The much bigger piece of it.
Do you see repeatability.
More or less or even in the same ZIP code of the first half results from AD Tech.
Looking into the second half notwithstanding the fact that some of your your entertainment business is still.
I have seen co bid.
Headwinds in the second half.
I am I thinking in that what we can expect is that nothing happened in Q2 that isn't repeatable in the sense that I.
I think our our cost cuts on the commercial side are durable.
I don't know that given everything that's going on with Covre that I could say that the especially the entertainment business is going to have a strong recovery in the back half of the air and less so we have some pretty major good news coming out of especially out of China. So so that ones that when kind of looks like were steady state the Q2 and on the government side.
The government business has been strong we've got good bid activity. There we've got strong performance within the business. So yes, I think I think Q twos is repeatable if not beautiful.
Good.
Thats helpful. Thanks, and then.
The main value drivers in oilfield being RSV and products in the time being for RMBS.
Or worse for example, contemplating a continued glide down with activity as rig count probably suffers a little bit in the second half.
The Dechra EBITDA Decrementals that we saw from Q1 into Q2, which is kind of 45% Decrementals, taking your margins down two points to me. That's that's how I would think about modeling the decrementals going forward, which would put me into kind of 27, 28% EBITDA margins. Later this year does that make sense to you or do you think that.
With the cost outs that maybe you could you could do a little better than that.
I think that I think again and when we talk about cost outs and another question came up earlier, when we get too we get to the level of post 85, we've taken out we're talking about process improvements we're talking about some other things.
Not just headcount cuts for example, and so I think we will continue to work on that.
I don't think it'd be a lot worse, but but we got to really count on more incremental benefit from from our cost improvement maybe is the way to put it when we talk about process change.
We got it we got to keep after that because like you said there is there's a theres a trend there that we got to get ahead of.
Yes.
Thanks, Rob colored insights that I appreciate it.
Yes.
I was reminded if you'd like to ask a question. Please press star flows in the number one on your telephone keypad.
Our next question is from that fashionable with Scotiabank. Your line is on them.
Hey, guys did not and thank you for taking my questions.
Hey, good morning Thats.
Morning.
Can you speak about just the covenant what you have down the debt today and how are you status and App, you've got to make any adjustments.
That allowed endless covenants.
Yes, that's with our debt covenants, we have a.
Debt to total cap, which is on an adjusted basis as you just indicated so the impairments that we've taken up in the last couple of years were added back to the overall equation. So.
As the covenants stands is on a.
Total debt to total cap just to add a 55% level. If you do the math, we're probably in the low 30% range.
So we we do not feel like we're at any risk on the debt covenants.
And it also means that we have access to our revolver before the full above our.
Correct.
As it has as a as a anecdotal way of looking at it.
Can you speak about the and when that project work it seems like it's been pushed back.
Do you do.
Speaking about when can we expect that to common stock happening.
So but yes go ahead finished the question.
Well I was just not asking about like hedges just given the Glenn if you had lagged Pierre has had many issues that angle that Andrea.
I guess, what what hedges in place.
Sure. So I'll start with the certainly I mean.
Our biggest thing there is actually weve customer wants to do the work we want to do the work, but but mobilization right. Now has been challenged just trying to bring it's a pretty big spread that's there, but we've got people that need to come in and we need to get a mobilized in Angola, and then we need to have sort of a window that we believe that you're going in and you're working on it.
In some cases live wells you need to believe that you're going to be able to finish. The work you don't want to get started not be able to finish. So we're looking for that window, where we believe.
The situation to covert situation in West Africa to stabilize the point, where we're comfortable that we'll be able to execute the the whole the whole project. So it's it's that that's more of a that's more of a win but I can't tell you for sure whether it will be.
I think it's going to be tough for us to complete in in 2020, but but we're hoping that we can at least get started but again, it's that one's pretty wide open based on going which is very hard to predict.
From the from the hedge standpoint, I would tell you that.
Most of our contracts, especially in West Africa are our currencies are matched to our costs pretty well so theres a built in edge in the contract. So we don't believe that.
Whether this when this contract is executed that will be left with any undue quanta exposure because I think we're pretty well matched in in currencies to what what will span and what will receive.
Okay. That's helpful and maybe if I can squeeze in one so it sounds like.
Thank you talked quite a is typically seasonally strong, but obviously given the macro lead to be done many now but it sounds like.
And ladies business in each of the business it could be modestly down from Q3, Q Navy products is flat to modestly up.
And advanced technology, maybe flat to modestly up is that CMBS and looking characterizing the team next quarter.
Yes, I doing so.
Go ahead Alan jump in.
I think you called it nothing.
Products being up is certainly.
Somewhat of a little bit of a slide from Q2 into Q3 on some of the.
Raw materials that we didnt get in in Q2 that we anticipated to put into the production process. So we anticipate those will happen in Q3, which will drive.
Topline, but very little bottom line impact at all just because.
The nature of the materials were putting in.
So it could impact topline, but I wouldnt.
Drive a lot of.
From it.
And the advanced Technologies, Inc.
And business can offset to the commercial aspect.
I think what I would look at is very similar to kind of the Q2 aspects, where we had low levels of inter tame in commercial business.
Similarly, I would think it'd be less in Q3 by the.
Government businesses.
Okay. That's very helpful. Thank you for taking my questions.
Except.
Our final question comes from Genzyme with Wolfe Research Your line is open.
Hey, Thanks, guys for forgive me on here just wanted to swing back to to Aro. These specifically on the margin.
Looks like enter bits of margin degradation from pricing at least if implied day ready to sort of a proxy for pricing, obviously offset by a lot of the cost out that you continue to take from that business. If I look at first half margins, though relative to an implied day rate. That's an all time low the margins on the beside or are fairly high for our these.
On the first half versus.
Certainly the 2018 trough.
You rationalize the fleet, it's more capable, it's probably lower lower cost.
I appreciate and Youre, adding some auxiliary services now just to maybe sweeten the deal and then in the context of the drillers likely not taking any lower pricing just because they can't I'm just wondering.
Modeling on the on the implied day rate and how that impacts the margin what we should expect.
Even in the worst case scenario for activity in deepwater just some of the puts and takes and your thoughts around already margins would be really helpful.
Sure. So let me start with the with the day rate.
We scrubbed the day rate pretty hard because you'd like you said, if you kind of take out the drop in a number of days it looks like we got to get on day rate and Thats. It's actually not the case, we held day rate really well, but we consider an active day, even when we're on standby and so what we did have this last quarter as you might expect covered.
Related where we are moving people in and out they had trouble on the rig getting people in and out even if they weren't oceaneering folks and so we had more standby days either.
Getting the rig mobilized or demobilized and so those standby days go into the mix at a lower rates. So it looks like a lower price, but it really we havent had to make price concessions and and I. Unfortunately, I think we're in that rig category, where you just can't know much lower so so that's been that's been pretty stable going forward.
I think we're just going to have to keep challenging ourselves to do better I mean, some of the things that we can do to deliver the same value to the customer you know we've we've been touting what we can do remotely meaning we can you going to fewer people on the rig because you mentioned the sweeten. The deal. We can we can have guys that dude to job.
They can operate the tooling they can operate an ROI, Oxford IWALKS system.
They can they can do some of the communications work. So they can do some of the survey work. So so being able to have multipurpose flares that that reduced the cost of the customer. They also reduce the cost oceaneering and we share the benefits I think thats, where those kinds of things are that things were really going to have to push to drive margin in the future along with like the technology side.
Remote operations. So those things are important and I believe there achievable because again theres benefit both us and the customer in and when we talk about that kind of scraping the bottom on price. That's one of the benefits. We can one of the cost benefits, we can give it the customer without necessarily being lose lose situation.
Got it Thats helpful did want to revisit the the cost out program.
Just put a fine fine point on maybe some the language around what you what you mentioned so 85 million.
And the already have the depreciation piece in hand, the 85 million is that of today or is at quarter end and then when you say initiated is that.
That the processes are in place and maybe not you're not realizing the full 85 or have you already realized the full 85, I guess I'm just asking in the context of my notes here I think you previously mentioned 54 or so million annualized at the end of the first quarter. So just trying to understand from a timing perspective, it seems like youre getting out ahead of the.
Cost cut timeline.
And then I'm wondering too if we if we kind of staying in this unpredictable environment, if theres upside to that.
All in 160 number moving forward.
Yeah. So you so your your other contracts. So when you when you think about 85 think about 85 being at the end of the quarter. We had we had processes in place to capture $85 million annualized, but we didn't get the full goodness of that all through Q2. So when you take those things they should add more goodness to Q3.
And they did in Q2, plus we want to add more to 85 identified so it's a it's a growing number and the way I would think about it is if we hit 160, including the depreciation expense reduction if we hit the if we hit the full 160, that's something we should be able to realize most if not entirely in 2000.
21, so as that number grows it is sort of a leading edge, but but we keep adding to that we keep adding to the mix of what's in there plus we get to realize more and more of the benefit of that and each subsequent quarter. So you got it.
Other thing the other thing I would say is what about the 160 I.
I think if we see challenges and we start to see and I think we mentioned this earlier on the call, but we need to be very specific about we need to go back to regions. We need to go back to contracts, we need to lead to improved processes, not just not just cutting cost, but improving efficiencies. So some of those process improvements.
Take a little bit longer to ramp up sometimes of facility. We gotta, we got we got to run out the lease expenses. So we can we can move out we can shut off the lights, we can.
We can not have although the care and maintenance, but that it takes a while to get out of the full expense facility. As an example, so so all of those things what I think going forward is if the market gets tougher surely there is going to be more opportunities, where we can say.
This this has gone upside down we can take that cost out.
We could be we can continue to be very surgical about going out and taken all places where it's no longer viable.
Option for us to be there or it's just subscale.
So so Blake I want to try and be clear, though we're looking at in Q1, we identified it as being 70 million.
That moved to 85.
We're trying to say these are structural this is not the variable cost associated with going in performing a job.
That would that would be even a bigger number. So we're trying to be focused on what is sustainable cost out structurally driven cost.
That as Rob said would not return in 2021.
Got it yes that makes sense I just wanted to make sure. It was point in time and not quarterly average and then to your point about variable costs on top I mean, even if you pull out those structural cost. The decrementals are still really good in the second quarter. So I definitely understand on that in appreciate the commentary.
If I could sneak one quick one in here just on energy transition obviously its topic does your while activity levels and the outlook are still relatively subdued.
You just remind us most specifically in projects, where you play in some of the renewable space and maybe what some of your leading edge conversations are with with customers or potential projects in that.
So so it's so projects as a place one of our biggest operations those RV support to the so we are supporting a lot of the big vessels that are out there doing wind projects, particularly in the north sea, So generally European sector.
We do we've got great relationships with the with a major contractors there so thats been good.
Probably remember we bought E costs, which is real clearance. So that's got some trenching and some some boulder removal or boulder clearance and things like that so we've got we've got work their projects as well, we I think we are highly.
Transferable skills, we have ups from highly transferable skills to go into that marine environment. So we look at more of that.
I think survey is probably want to place we participate in most in our survey group as has been more involved in say the east coast, United States work and some of the other groups. So that's kind of the pointing to the sphere there for us and then.
Asset integrity, I mean, as we get into more Aimar, an inspection work for installed base and that installed base continues to grow we believe that we'll be able to apply more of our asset integrity and asset management skills to that part.
The work, but it is it is growing.
Relationships are growing.
We invest in that that side of the business in the sense of finding people that are more familiar with that that part of the business and so that we can go up pursue more of the work, but I think penetration has been good and I think it's in generally it's a it's a good thing for the oilfield because we've got so much experience in marine construction.
That we could actually accelerate the transition there and get offshore wind going faster than if we just depending on sort of a new group of player. So.
Mostly good news for our first sector.
Excellent excellent really appreciate the uptake guys. Thanks, yeah. Thanks Blake.
We have no further questions at this time I turn the call back to Roberson for closing remarks.
Great well since there are no more questions I, just want to wrap up by thanking everybody for joining the call and this concludes our second quarter 2020 conference call. Thanks, everybody.
This concludes today's conference call you may now disconnect.
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