Q3 2020 Oceaneering International Inc Earnings Call
[music].
My name is one thing and I will be your conference operator.
Welcome everyone to Oceaneering third quarter 2012 earnings conference call.
All lines have been placed on mute to prevent any background noise. After.
After the speakers remarks, there will be a question and answer period with that I will now turn the call over to Mark Peterson Ocean.
Oh, senior Vice President of corporate development and Investor Relations.
Thanks, Lindsay good morning, and welcome everyone to Oceaneering third quarter 2020 results conference call.
Today's call is being webcast a replay will be available on those shows website with.
With me 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 are also non-GAAP.
Also include non-GAAP financial measures additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our third quarter press release, we welcome your questions. After the prepared statements I will now turn the call over to Rod.
Good morning, Thanks, Mark and thanks, everyone for joining the call today.
Today I'll review the details of our third quarter results and I'll provide you with outlook commentary and guidance for the fourth quarter of 2020 and for the full year 2021, and after my closing remarks, we'll open the call for questions. So.
So to start with I am pleased to report that our third quarter 2020 results reflect the benefit of previously disclosed cost improvement initiatives and the recently announced realignment of our segments. Despite.
Despite continuing energy and entertainment market headwinds, we generated free cash flow in both adjusted earnings before interest taxes, depreciation and amortization or EBITDA and adjusted operating income improved as compared to the second quarter of 2020.
I'm proud of how our employees have stepped up to the challenges brought on by the global pandemic operating model changes and cost improvement initiatives.
All the while continuing to deliver quality service and products to our customers safely and with minimal logistical delays.
Now looking at our third quarter 2020 financial results.
Our adjusted operating results exceeded our initial expectations and consolidated adjusted EBITDA of $45.1 million exceeded published consensus overall.
Overall, we were encouraged by the performance of our energy businesses and the stable contribution from our aerospace Aerospace and defense technologies segment or AD Tech.
Compared to our adjusted second quarter 2020 results consolidated adjusted operating income for the third quarter 2020 improved by $5.1 million as efficiency gains from our cost out efforts are meaningfully enhancing our bottom line results.
Each operating segment reported positive adjusted operating income and adjusted EBITDA sequentially. The adjusted operating results for each of our segments, except subsea robotics improved as compared to our second quarter 2020.
Our cash position of $359 million at September Thirtyth 2020 increased by $25.3 million from June Thirtyth 2020, as we generated $19 million of free cash flow largely driven by positive contributions from operations and working capital and ongoing capital conservation.
Now, let's look at our business operations by segment for the third quarter of 2020.
Subsea robotics adjusted operating income declined by $1.3 million on flat revenue as compared to the second quarter 2020, primarily due to lower contributions from our tooling and survey businesses.
Due to this lower contribution socio robotics adjusted EBITDA margin decline.
And for the third quarter 2020.
As compared to 32% in the second quarter 2020.
For the third quarter 2020, the revenue split between our remotely operated for RV business and our combined tooling and survey businesses as a percentage of our subsea robotics revenue was 83% and 17% respectively. The same as the prior quarter.
Our third quarter RV performance was comparable with the second quarter 2020 as.
As of September Thirtyth 2020, our RV fleet Count was 250 systems. The same as June Thirtyth 2020, our.
Our fleet utilization during the third quarter 2020 was 59% the same as the prior quarter base.
Based on higher were 13601 in the third quarter as compared to 13501 in the second quarter.
Average our RV revenue per day on hire was marginally lower declining 1% sequentially, primarily due to the changes in geographic mix.
Our RV fleet use mixed during the quarter was 56% in drill support and 44% and vessel based activity as compared to 64% and 36% respectively in the prior quarter.
The average number of working floating rigs during the third quarter 2020 was 85 as compared to 96 during the prior quarter, which led to fewer days on hire for drill support services. However, this decrease was offset by an increase in days on hire per vessel based services.
During the quarter, our drill support market share decreased to 57% with R&D contracts on 76 of the 133 floating rigs under contract at the end of September discuss.
This compares to a 62% drill support market share with our Ob contracts on 86 of the 139 floating rigs contracted at the end of June subject.
Subject to quarterly variances, we continue to expect our drill support market share to generally remain in the 60% range.
Turning to manufactured products sequentially third quarter 2020, adjusted operating income improved slightly on a 10% increase in revenue.
Much of the revenue increase was attributed to percentage of completion revenue recognition on certain lower margin project components in our umbilical manufacturing business.
During the third quarter COVID-19 had limited impact on our energy manufacturing business that continue to adversely affect manufacturing timing in our non energy entertainment business.
Overall for year to date 2020 reduced order intake and our energy related manufacturing business is primarily attributable to a significant decrease in final investment decisions undertaken by our oil and gas customers due to low oil demand and pricing.
Our manufactured products backlog at September Thirtyth, 2020 was $318 million compared to our recast June Thirtyth 2020 backlog of $380 million during.
During the third quarter order intake was $49 million or book to Bill ratio year to date was 0.4 and for the past 12 months was point fives.
Sequentially offshore projects group adjusted operating results improved on flat revenues callout work during the third quarter was relatively consistent with the second quarter 2020 with improved results benefiting from the cost outs and operating synergies implemented in connection with our new operating model.
The impact of COVID-19 continue to delay the Angola light well intervention project, but we are optimistic that this work will begin to move forward either late in the fourth quarter 2020 or early in the first quarter of 2021.
For integrity management and digital solutions adjusted operating results improved sequentially on flat revenue.
These results were largely due to improved execution as second quarter adjusted results were impacted by nonrecurring costs on certain completed projects.
Our aerospace and defense technologies segment reported slightly higher sequential adjusted operating results for the third quarter 2020 on slightly higher revenue.
AD Tech represented approximately 19% of our consolidated revenue for the third quarter and we appreciate the relative stability that these businesses can have on these businesses considering the challenges currently faced in our energy businesses as previously announced we were awarded two meaningful contracts during the quarter.
One in our space systems business, where we will be teaming with dynamics and supportive developing a human lunar landing system for NASA and one in our defense subsea technologies business, where we will be operating and maintaining the US Navy submarine rescue systems for up to five years, assuming annual contract renewals.
Unallocated expenses for the third quarter 2020 were lower than the second quarter 2020, due primarily to lower accruals for incentive based compensation.
Capital expenditures for the third quarter 2020 totaled $8 million as we continue to exercise strict capital discipline.
For the nine months ended September Thirtyth 2020, we generated $32.4 million in cash flow from operating activities and spent $45.8 million on capital expenditures, resulting in a net use of cash of $13.5 million at the end of the third quarter, we had $359 million in cash and an and.
Around $500 million unsecured revolving credit facility, providing us with strong liquidity.
Now I'll address the outlook for the fourth quarter of 2020.
With the onset of lower seasonal offshore activity and customer budget exhaustion negatively affecting our energy businesses. We believe our fourth quarter 2020 results will decline sequentially.
We're expecting lower operating results in each of our segments except manufactured products.
Unallocated expenses are expected to approximate $30 million during the fourth quarter, we expect to generate positive free cash flow, which will benefit from positive changes in working capital and cares Act tax refunds.
By segment.
For our subsea robotic segment, we are expecting lower revenue and operating results due to fewer utilization days in connection with reduced seasonal demand for vessel based R&D services tooling services and survey services.
We believe that the working count for floating drilling rigs has largely stabilized over the past few months and will we will not see a marked decline in working count during the fourth quarter we.
We are forecasting our overall R&D fleet utilization for the quarter will decline to the low 50% range. We project EBITDA margins will decline to the high 20% range.
For manufactured products, we expect higher revenue and operating results due to increased throughput on certain percentage of completion projects and our umbilical manufacturing business.
We project operating margins to remain in the mid single digit range order intake is expected to remain at subdued levels in our energy manufactured products and entertainment businesses.
For offshore projects group, we expect the decline in revenue and operating results, primarily attributable to lower anticipated levels of call out work being performed in the us Gulf of Mexico.
For our integrity management and digital solutions, we expect modestly lower revenue and operating results during the fourth quarter.
For aerospace and defense technologies, we expect operating income to be flat to slightly down on higher revenue.
The revenue increase was primarily attributable to the startup of several new projects across our AD tech businesses with the implied lower operating margins, resulting from startup costs and change in project mix.
For the full year of 2020, we expect to generate adjusted EBITDA in the range of $165 million to $175 million. We are narrowing our guidance range for capital expenditures to 50 million to $60 million, we affirm guidance on cash tax payments in the range of 30 million to $35 million and.
Our expectation of cares act and other tax refunds in the range of $16 million to $34 million.
We continue to expect generating positive free cash flow for the full year of 2020.
We announced a plan at the end of first quarter 2020 to reduce 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.
We estimate that since launching this plan approximately $100 million of annualized cost reductions have been initiated exclusive of depreciation with additional savings expected to be achieved through the fourth quarter of 2020.
We continue to estimate that the cash costs associated with these actions to approximate $15 million for 2020.
And now looking ahead to 2021.
We anticipate the oil sector will face continuing headwinds in 2021 due to uncertainties around demand recovery and the resulting softness in energy commodity prices. Despite this backdrop. We currently expect our consolidated activity levels and EBITDA performance in 2021 will closely resemble 2020, we.
We also expect to generate significant free cash flow in 2021, which will also benefit from a working capital release associated with final project milestones in our manufactured products segment.
We will continue to review our forecast as we develop a definitive operating plan for 2021, and we will update our expectations during the year end reporting process.
And in conclusion.
This has been a challenging year for all of US Oceaneering has responded to these challenges by instituting significant structural cost reductions and reorganizing our business segments to capture operating synergies and operate profitably in a lower activity market.
Thanks to the hard work of our dedicated team. These actions are showing quantifiable results as evidenced by our expectation to meet or exceed 29 teens adjusted EBITDA performance in 2020.
And maintaining or improving this performance in 2021, despite continuing energy market headwinds.
We remain focused on generating free cash flow.
Reserving and improving our liquidity and balance sheet remains a high priority deferred capital discipline policy. We adopted in 2020 is delivering results, which we expect will provide meaningful free cash flow in the future and gives us the flexibility to address our revolving credit facility maturity in January 2023, and our $500 million senior notes mature.
Pretty in November 2024.
We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you may now.
At this time I would like to ask a question. Please press Star then the number one on your telephone keypad.
Our first question comes from the line of Ian Macpherson with Simmons Energy. Your line is open. Please go ahead.
Good morning, Dan.
Hey, Rod good morning, Thanks for the overview always.
Very helpful and.
Well organized I mean, what really strikes me as the you know the.
All for flattish results next year.
Particularly robotics, I mean, you're you're witnessing a downward sloping.
Year from Q1 to Q4 of 2020 and the rig contracting forensics had been obviously been very anemic. So.
You see this business.
Much more clearly than the outsiders by guidance. So what gives you comfort on that and then also.
On products as well you've had.
Oh 0.5 book to Bill year to date, so how do you see that stabilizing the next year as well, but those are the two biggest pieces I'd like to get maybe some more pain on the power side. If you can provide it for now.
I'm I'm really glad you asked it because you know weve talked that we've talked ourselves about.
Trying to give a little at least a little better understanding when we talk about the consolidated results.
These the puzzle pieces are going to be different so what we see for robotics and I'll talk a little bit about those but I want everybody to think about the strength in our AD Tech division that we've talked about in some of the other parts of our business that are that are flying a little bit separate from energy.
As part of that Thats part of the puzzle it helps us in 2021, but but specifically to robotics.
With this we know it's not a it's not a a mirror image, where you say first quarter looks good like it did in 20 and we we modeled through the others. It's really is about a stepping off point, it's a very believable walk from from Q3 to Q4 to into 2021, So we don't.
See any huge.
Spring back in and working rigs, but we do think that you can close the gap between contract and working rigs we can get a couple more contracts and we'll see some lift in that and that comes directly from our customers and their confidence to build budgets around offshore activity. So I mean, we reviewed with all of that just in the past few weeks and we feel comfortable with that.
But it's not I don't want you may think we baked in some some big V shape recovery, because that's not what's in there and the same for same for manufactured products. I mean, we think that we can keep collecting some orders and doing some things, but again, we don't expect a huge spring back and fivee in in in 2021. So it's some good.
Good work that we're finishing in the first half of the year and then collecting some of the smaller bits and pieces tie backs and things like that for the back half of the year that we can get in that we can get into the plans, but it's not it's nothing dramatic. So it's nothing that would would run I would say in contrast to what other people are saying.
Yes, right and then just a quick comment as it also 21 benefits from the full year of the cost improvement initiatives that we've executed on during 2020. So that also factors into the overall decision with our guidance exactly thanks Alan.
Yes. Thank you both on those and then on AD that is that more of a likely grow our four even 21 based on the recent contract wins and what you expect to garner going down we see those we see those a couple of wins in the bucket already and some other opportunities. So we do think that well again, not dramatic growth, but steady delivery so and.
Less susceptible to some of the some of the I think concerns everybody has about the offshore market.
Very good thanks Rod.
Thanks Ian.
Our next question comes from the line of Sean Meakim with JP Morgan.
Your line is open.
And Sean Thank you good morning.
So to start I mean kudos for your willingness to provide expectations for next year, most of not been willing or able.
Greetings.
So just to build on that discussion so.
Let me talk about the confidence around free cash flow and the next year and working capital being a big piece of it. So if we could you maybe from Alan.
Right how to hear your thoughts to it'd be nice to hear.
Your expectations for.
Free cash flow, maybe operating cash flow and how that translates into free cash 20, and 21 ex working capital and were one time items like the cares act. So if you're kind of able to strip those pieces out no doubt you'll take the cash where we can get at this point in the cycle.
Where do we stand on an operating cash flow normal.
Normalized basis between 21 that makes sense.
Yes, let me start here and Rob can add some color to the launch.
For the guidance and we were getting with saying significant free cash flow next year.
It does not include any money coming in from the care stacked Jack so.
That expectation is built in that we will have most of that we're seeing this year and 2020.
Could it bleed over into 21, yes, but that's that's not a component that we're using to drive significant free cash flow and 21 the prevailing.
Items that will help us with driving significant free cash flow are one the expectation we can keep our EBITDA you know in the same ballpark that we're at this year.
That's a primary contributor as well as the release from.
Okay.
Receivables I'll say as working capital with milestone related events on the two projects that we have in the umbilical business right now so.
The timing of those payments you know Paul.
Then a little bit of a.
Cash negative for us this year it turns to a positive next year. So that's going to be the prevailing other item that will help us drive free cash flow.
And the only thing I view as I, just I like the for all its simple math right. If you. If you say that we identified these $100 million of cost out over the period of 2020.
And just figure it was all straight line started at the beginning you know got through a lot in the only realized part of this year simple math would tell you. If you know did we did we probably didn't even get half of those that did contribute to results. This year.
Think about a full year of those those results for next year, So thats as of year over year those that cost out still has a lot more impact in next year than it did this year.
Right, Okay fair enough I appreciate that and then maybe just.
Walk through.
The decision, making around the Capex guidance for this year only one quarter left.
As I was curious I thought maybe that we just narrowed around the midpoint, but didnt say take it down.
And just thoughts around where you'll end up the.
I understand the 30 million dollar number for our unallocated for Fourq, you I'm not sure with a seasonality to that what's the proper run rate.
Our unallocated and thoughts around Capex.
As we stand here for next year.
Yes, I would look at first off the unallocated I think 30 million is probably a reasonable run rate until we get a definitive plan in place.
Looking at 21.
When I look at the Capex Guide you know certainly we have looked at growth versus maintenance Capex. We see that we've had some growth capex in 2020, as we had the drill pipe Roger contract that we were completing.
We could go a little bit lower.
Obviously, if you just took off the growth Capex that we had in 2020 from where we are at this point in time.
I would say, though we do still see reason for investment in our digital solutions within our Tegra. The management digital solutions, we see opportunity there, we see opportunity here with some of the issues tied vehicles within the ROI.
Our lease space as well as what we're doing with our freedom vehicle. So there will continue to be some element of growth capex required as we move forward.
All right fair enough I appreciate that.
Our next question comes from the line of Taylor, Sir with Tudor Pickering Holt. Your line is now open.
Hi, good morning, and thanks for all the color on Q4, and 2021 and well.
First question is on the cost out program, you've clearly made quite a bit of progress there year to date.
Including the BDNA, you're right in the middle of that region.
Original $125 million to $160 million Copout target range, you provided earlier this year and.
Do you have a target as to where you expect to be exiting the year on that cost out program. As we continue to move forward. It just seems that you're finding incremental ways to drive that targeted a bit higher at least in savings faster than you previously anticipated any.
Any thought.
On where that that total annualized cost out number could end up as we enter 2021.
I think we're going to get a big part of it of the remaining 20 in Q4, we just got we just got a lot of work going in and then you hit it right I mean whenever you do work like this it says it's sort of that peeling. The onion model I mean, as you find things and you take care of them.
Number one you find other things, but number two you also you also get better at it and so at you and you see it better. So I think the possibilities increases you go it's a it's sort of a logarithmic decline obviously you take care of the big things first and you see that that tail runs for a long time as I would say that.
Like again, most I think we get most of 2000 and air in this in 20 maturity declare this year and then then we are going to be keep still looking for things in 2021. So it's a it's a gift that keeps giving if you've got a team stood up and you and you keep driving that that sort of mentality inside the company.
Understood and then for 2021, it doesn't sound like you're forecasting really much in the way of a V shaped recovery it on Subcu robotics.
I think one of the previous question. You said you had just caught up with a number of new customers.
I was wondering if you could just characterize the tone of those conversations or is it a bit mixed or some are getting back to work and others are still down for part of it or whatever other reason maybe down but but.
General tone, you are hearing from your customers right now with respect to that.
Offshore activity and spending plans over the next 12 months, so it and so I would say kind of just general tone.
Very little very little lot being chewed off as as as Cove, It and they all are global operators right. They they go through a lot of tough things going on in the world generally not all at the same time like right now, but that they know how to operate tough conditions. So there they are back to work largely.
As far as they see that Theres under investment going on so far this year Theres theres.
A fair amount of economic recovery happening around the world. So they believe that that under investment and recovery could support prices and certainly at a point that supports continued offshore work, but they're also being very they're also being very.
Focused on where they work.
They say, there's not a lot of not a lot of rank wildcat type exploration, they're going to they're going to.
Jason leveraged oil as they speak things close to infrastructure that allow them to get maximum benefit from the infrastructure, that's already installed and so they're there they're very focused but they believe that it's a good time to make investment and for us we like that because that kind of work you know single Ultramax things like that.
Near field Tieback, that's that's good work for Oceaneering. So we're encouraged by what they are saying.
Got it well congrats on the quarter and thanks and responses. Thank you.
Your next question comes from the line of Mike Sabella with Bank of America. Your line is now open.
Hey mining Avalon.
Oh, yes.
Just kind of wondering if we could talk a little bit about sort of the outlook for maintenance spending at the customer base next year.
Got it bottom, but we hear your guide.
Still been impediment.
Kind of step into the big long cycle projects.
It seemed that maintaining production as little capital as possible.
A key.
Can you just talk to us about how you think maintenance spending kind of as a whole trends over the next year commodity prices kind of remain.
Inbound near current levels.
So let me, let me divide maintenance spending into a couple of things production maintenance versus just just integrity management.
I think integrity management is something Thats very key.
Because number one just just a license to operate with everything that's going on I guess, you just can't afford mistakes you can't afford a loss of mechanical integrity. So so they will continue to invest that will be something that they want to be smarter and at a better cost point, because because it's not revenue generating necessarily its cost avoidance. So they will work really hard.
To to look for good solutions and not a bad thing for us because we believe we can we can be part of that I would call it upskilling and getting better at that so I see that as a as a fairly positive trend in that integrity management part and then in the production management, where we're trying to again, the the cheapest barrels already behind pipe.
They are already connected to it to the flow lines. So we want to make sure that we can do all we can with light well intervention with flow route flow remediation and some of the other work that we do with that some secret and I think that I think thats going to be strong, especially if we see some some price support and you know how to make the most of your budget those are good.
Spans generally and like you said you don't have to commit to long cycle projects. So I think you hit it I think those are going to be fairly decent spots coming out for the next year.
Perfect and then.
When we kind of think of capital allocation from here.
Sneering Eos, though.
You build cash is there anything you can do at this point that maybe help improve the capital efficiency.
Thank you see in the capital structure is.
Any way to kind of put that pilot EPS from work to earn a return remaining.
I'll, let Alan answer a little bit, but I'll just jump in with what we were looking at a lot of things I mean, obviously.
You look at what's going on if the debt start trading at a discount what things can you do out there in the market.
So yeah in Lake like we've said pretty obviously that is a lot of that cash is sitting there with the expectation its going to be used to retire a significant portion of our of our 24 debt maturities. So it's it's still the goal is still something we're watching so I think I think thats where that's.
Where we're looking right now.
Spot on I mean.
Good clarity.
Great. Thanks.
Thank you.
Our next question comes from the line of Kurt Hallead with RBC. Your line is now open.
Hey, good morning foreign Kurt.
I appreciate you guys called out on the land that is going probably want good to us.
Thank you. Thank you.
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Hey, just just I know you guys.
Got you just a high level dynamic and that's the most important.
Element as we look out into 2021, but you always kind of beg the question around your different segments, which ones yes.
When you are thinking about flat on a year on year basis overall, EBITDA, you're investing seven positive tailwinds for us or AD tech looks like a positive tailwinds manufactured products, so kind of taking that information.
At Daqing manufactured product could be up on a year on year basis and segment EBITDA and the other ones could be maybe flat to slightly down is that kind of a.
Good way to at least start to think about the individual pieces for next year.
Karen I think where we're going to wait for the details on where it goes but he caught the AD tech flavor certainly correctly from Rod you know, we do see that year on year that could be.
You know an element that's outside the energy sector with the recent contract awards it could be beneficial.
Manufactured products I think what I was hearing was more of them.
We have contracts that kind of we'll be working through their backlog in the first half of the year in the back half of the year is probably going to be more challenged. So I don't think we were trying to guide anyone up on manufactured products for next year I.
I think it's more of the time of when some of that revenue could come through.
If you look at the other parts of the business.
Within the offshore projects group.
While we would have anticipated executing on the light well intervention project in 2020.
Looks like more of that is probably moving into 21. So.
Yes that could be a little bit of a tailwind.
As we go into the next year, so there can be various moving pieces.
And we still need to work through the details to give you better clarity okay.
Okay. That's fine I appreciate that so in the context of the.
Incremental free cash flow expected, then quite 20 why he reconnects.
Address the prior.
Question to a certain extent, but as you think it through and you build cash on the balance sheet. No can you give us some insight testing are you looking at this as a potential re fi opportunity for the debt or are you actually looking at the prospect of reducing some of that debt load as you work through 2021.
I think all the above I think it is going to be.
The flexibility and Optionality that the cash will provide us you know.
We will look at the markets and what they may bring to us and what would be right to do at the time.
So we we actively review that.
Okay and finally.
Capex you guys have exposure to the renewable energy segment. I think you guys are very well aware of how much attention that has gotten from investors lightly. Unfortunately at the expense of oilfield service and other traditional energy plays but you do have exposure to the offshore wind market through a cost I was just wondering if you might be able to give us an update.
They did that maybe some of your updated thoughts on how you see your exposure to the renewable market evolving.
We I think we are still very excited about it I mean I think the we like you said, we've got exposure, we're already doing a lot of work.
A lot of people I don't think most people realize that while we havent cost in the in the route clearance that came with it our biggest participation is still in the traditional businesses. The survey in the RV and and some of the work and we are doing with tooling. So that stuff is there and it's it's alive and well.
And we build we build more and more relationships with.
With the other installers and.
Companies that service that business so.
We're excited about it I think we're all kind of hoping that it grows like it is today. It is expected, but it's always been a little bit further out than we thought so it's got to you know, it's it's got to be big and it's in hopefully it happens it happens sooner now with some of the emphasis put on energy transition.
Yeah. So what can you give us some tail effect and maybe what the what the revenue exposure currently is.
Now for for maybe that renewable pizza piece of the business.
We haven't broken it out because it's why I try not to oversell. This a little bit goods still it's still a fairly small part of our business because it only affects us in certain places right I mean, it's a it's a it's a it's actually a decent portion of our north Sea business.
But but overall across the globe it doesnt.
Large and we've been we've been pretty good at capturing some of the work happening here in the East coast, United States, but thats been it's just not a ton of activity yet.
Okay, great appreciate that color. Thank you.
Our next question comes from Blake Gendron with Wolfe Research.
Line is now open.
Yeah. Thanks, Good morning, I wanted to circle back on the AD Tech business Im just trying to get a split for government revenue versus commercial I think the old Tech business.
It's about two thirds government and then within that government piece, how much of that is space versus other.
Aerospace and defense spending.
On the contractor side just.
Just to put a fine point on it there seems to be some.
Worry about just U.S. government spending rolling over in 2022 and beyond that's obviously out of 2021 problem, we'll see what happens with the election.
But I guess to get a better feel for how much is space exposure versus broader Andy would be would be helpful.
So let me, let Alan talk to split so then I'll talk about contracting.
Okay, Yes.
Yes, no so.
Effectively 100% of the aerospace and defense is government related meaning are they are.
Few small commercial applications made for space, but it's it's a small component. So I think it's best to think of it as 100% is government related.
We have not broken out the space component by itself, but it tends to be a smaller component of the overall AD Tech segment itself.
So the lion share of what we see in that is more the traditional.
Defense technologies that we provide.
And as far as contracting goes you know a lot of a lot of the work. We do is rollover contract stuff. That's it's been continuing work that make it has grown but its not new work and so when we look at it.
Change of administration or things that could that could go wrong a lot of what we do or most of what we do would be under continuing resolution. So we don't see a lot of risk to that work as far as new work coming up I think.
The work that's going on at NASA seems to have really good bipartisan support, especially.
Especially return to the load and the things that we talked about today.
So I just met with a group of colleagues yesterday in and we're very close to support for the space program, because it's what they live and breathe every day and they felt they feel comfortable with that as well. So I don't think theres a lot of risk in that government business, but you know that it's there can always be some knee jerk reactions, but it would it would have to dig.
If you could have to disrupt work that's already going on.
That's our that's totally fair and I don't want to focus too much on the smaller parts of your business, but integrity and digital solutions is one of the more excited I think directionally. Some of the changes you made internally and maybe you can talk a little bit more commercially intense there. So I appreciate the growth capital potentially could go to that segment and I appreciate the run down on the prior question.
And as to the various opportunities I guess I'm just wondering what opportunities would you consider incremental for that segment and then if you were to pursue these opportunities would you anticipate any modest margin friction until you got critical scale in those applications or are you going to focus on being more commercially intense in the services that you provide.
Currently.
Hey, so.
Great question excited to hedge.
We view it is a it is a great focus area for us and it's something that I've been passionate passionate about for a while because I think the especially the integrity management piece has been very hands on mechanical work for a long time and all of our customers say I want to be able to inspect the pipeline and pressure vessel, but don't have.
Adding to open it up and put a man inside and things like this so so they're directionally. They really want to go this way so and when we talk about what can we do some of it is predictive analytics on that as you know big data processing. Some of it is embedded sensors some of it as use of drones and crawlers to get man out of the way. So there's this opportunity number one to go.
Other more data safely and we feel like we're well positioned to do that because we've got subject matter expertise weve had the guys hanging from ropes underneath the underneath the platforms. So we know how where what inspection gets done and how it gets done today, but we've also got the robotics side that this is something we did once before we took divers out of the water.
And replace them with machines, we believe we can take men off the ropes and replace them with machines. So there's there's that data gathering part that that I think is really good.
And generally speaking it's that whole business has been local lower capital intensity, but we do see the need to invest in some of the some of the robotics and some of the software to drive. This vision ahead and software as some like you said some frictional facts you investor really developing robotics you did ask are you invest early.
But but there, but they are very scalable and so while you go through some of that it's not huge capital investment like like building vessels.
And the scalability the investment is much much better once you get the product development. So I think it's a it's a great space to watch if you will because theres theres market pull for it and I think that the bank for the Buck is pretty high there.
Understood and if I could just squeeze one more in hypothetical world in which you had zero debt.
And you're looking to do some M&A, which segments in particular would you look to do either because you see attractive opportunities or because you think it's a space that from.
From a technological perspective could could benefit from the bolt on of various disparate technologies from from different end markets.
I think I think theres bolt ons in most of our businesses and I would say, though that when we talk about what I, just mentioned with robotics and specialty robotics I think there's a lot of ways to leverage our our knowledge about how to deploy how to maintain out of service I am hot it how to navigate and operate and train people to run the robotics that we.
It always take a unique robotic application and put it in our in our Arsenal and be able to deploy that quickly, whereas somebody who who had a really great idea, but doesn't know how to get it out in the market and get an operating on those partnerships, but he really powerful for us. So I think theres that again software development.
Maybe adding capabilities former marine logistics those are opportunities for us so it's pretty broad across the business. If we look for large scale large bolt ons for scale.
Those are a little more challenging because he just we just have to say.
How healthy are those businesses and is it something it's going to be accretive in the near term.
Even if it is maybe longer term.
That's very interesting thanks, guys.
Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question. Thanks does star one on your telephone keypad.
Our next question comes from the line of David Smith, with Heikkinen Energy Advisors.
Your line is now open.
Hi, good.
Good morning, Thank you.
Reiterate what what everyone else is headed.
About that.
The 21 guidance.
Okay very helpful. I appreciate it.
I did want to act with the segment realignment, we got a better view at some of the product and service lines and I was a little surprised that how.
Ill.
Negative that mobility solutions margins were in the first half and I understand theres uncertainty.
On the covered outlook and when that business picks back up but I wanted to ask about your approach to eliminate losses in that segment and whether it's possible to get those margins.
Breakeven without greenparks getting back to normal.
So.
It's that's an interesting it's a little bit of it really two sided coin.
Most of our business in the mobility solutions as has been the entertainment business Thats been the that's been the big part of it and of course entertainment even talk about any business that's been challenged.
The theme parks have been extremely challenged the first half of the year. So they slammed on the brakes on almost everything they were doing and I had a lot of our work was actually was in China. The for the first half of this year. So that was very challenged about getting back to China were actually they're in a small way right now but that that's the that's the biggest challenge there.
So we did we shifted we shifted down a lot we made some pretty significant cost cuts in that business, where we could without losing capability. So that was a that was a big hit a big reaction. There. If you look at the other half, though the other half of the business is one that is smaller and it's and we've been more project.
Based to date, we've been working on more standardized project products, but but you think about reducing the number of people in a plant by adding mobility solutions to a manufacturing plant keen interest in that because now.
After a global pandemic a lot of the customers are saying anytime that we could we could reduce.
The interaction of people to to make sure. These plants can keep up and running in a situation like we've experienced this year.
Definitely renewed interest and whether it's a manufacturing plant. We've we've done some work for hospitals as well.
The interest in that product is definitely going up so trying to feel those those interest to make sure which ones are real and which ones are lucky lose so to speak that just are curious about what that would mean has been has been kind of the the challenge. There is to make sure that we are chasing things that won't ever developed.
But it is it's a it's a two sided business and we knew that exactly I think we believe that some people had maybe higher expectations are higher understanding of those businesses and we we expected we get some questions. When that was when you can when you can get a little more visibility to that going forward.
Okay appreciate the color.
And the other one.
And question it looks like your vessel or the activity.
Higher in Q3 than at any point since 2013.
Just wondering if you could give any color around that pickup and whether anything in your 21 outlook.
Plus higher vessel.
R&D activity compared to the 20.
I would just say that relationships keep getting better with the vessel operators and for a while it it's a little bit challenging sometimes for us because we we were vessel operators in a big way and and they saw us as a competitor and so it was a little bit difficult.
To to reconcile your friend or enemy, but but now that number one we're doing more of our vessel operations on on spot higher and chart short term charter as well I think we're starting to resolve those relationships and we just we just picked up a significant contract with the vessel operator, so the relationship they are getting better.
Our placement onboard vessels owned by others is getting better and I think that's that's just a sign of how how we're building that that part of the market for for our customers.
Yes appreciate it.
There are no further questions in queue at this time I'll now hand, the call over to Mr. Robertson for closing comments.
Well, thanks, everybody for all the great questions and since there are no more I'd wrap up by thanking everybody for joining the call and this concludes our third quarter 2020 conference call.
This concludes today's conference call will now disconnect.
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Hi.