Q2 2021 Oceaneering International Inc Earnings Call
[music].
Good morning, My name is Julianne and that will be your conference operator, I would like to welcome everyone to the Oceaneering second quarter 2012.
Net earnings call.
All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer period.
With that I will now turn the call over to Mr. Mark Peterson Oceaneering, Vice President of corporate development and Investor Relations you may begin.
Thank you Julie.
Good morning, and welcome to Oceaneering second quarter 2021 results Conference call today's call is being webcast and a replay will be available on oceaneering website.
Joining us on the call today are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments and Alan.
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.
Jones of the private Securities Litigation Reform Act of $19.95, or.
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.
<unk> statements I will now turn the call over to Rod.
Thanks, Mark good morning, everybody and thanks for joining the call today.
We're pleased to be sharing our positive net income results and solid financial performance for the second quarter of 2021.
These results reflect a marked sequential increase in activity is 4 out of 5 of our operating.
<unk> delivered a revenue increase on average more than 19%.
As announced yesterday, we are raising our EBITDA guidance range to $200 million to $225 million for 2021 and to avoid any doubt or confusion, we are not changing our free cash flow guidance.
Confidence in increasing.
<unk> our guidance range stems from our strong first half 2021 financial performance the increase in demand and energy demand as a result of the increasing number of COVID-19 vaccinations, allowing for an easing of restrictions.
The OPEC plus production discipline, yielding supportive commodity prices and the positive trend in the global economic.
Recovery.
Confidence is returning to the energy services industry, and especially to those companies that can help their customers with carbon reduction goals. This combined with an expected rebound in our mobility solutions businesses and continued growth in our government businesses underpinning our general expectation for increased activity levels.
<unk> over the next several years.
Now I'll focus my comments on our performance for the second quarter of 2021, our current market outlook.
Oceaneering is consolidated and business segment outlook for the third quarter of 2021, and Oceaneering improved consolidated 2021 outlook, including a higher <unk>.
EBITDA guidance range continued expectation to generate free cash flow in excess of 2020, and reducing our net debt position.
After these comments I will then make some closing remarks before opening the call to your questions now.
Now to our second quarter summary results, we were very pleased with our adjusted operating result.
<unk> for the quarter, we generated adjusted earnings before interest taxes, depreciation and amortization or adjusted EBITDA of $66 million exceeding consensus estimates.
During the second quarter, we generated $55 million in cash from operating activities and used $12.6 million.
For maintenance and growth capital expenditures, resulting in free cash flow generation of $37.9 million and.
In addition, during the quarter, we retired $30.5 million of our 2024 senior notes through open market repurchases.
In total our cash position increased by $13.3 million.
Resulting in a cash balance of $456 million at the end of the second quarter.
Liquidity remains strong with no borrowings against our $500 million revolving credit facility and no loan maturities until November of 2024.
The positive operating results were attributable to a seasonally influenced <unk>.
14% sequential growth in revenue complemented by continued operating discipline and incremental efficiency gains as expected compared to the first quarter of 2021, our energy segments in aggregate posted double digit revenue growth and improved adjusted operating results in the second quarter.
Our aerospace and defense.
<unk>, our AD Tech segment delivered sequential growth and solid adjusted operating results.
<unk> consolidated adjusted operating results increased by $9.1 million with all of our operating segments generating positive adjusted operating results and EBITDA.
Now, let's look at our business operations by segment for the second.
Second quarter of 2021.
Subsea robotics or SSR adjusted operating income improved.
Improved on nearly 20% higher revenue or SSR quarterly adjusted EBITDA margin of 31% was consistent with recent quarters as pricing remains stable.
Operating activity in our <unk>.
Segment resulted in sequentially higher ROE days and related tooling activity and higher survey activity.
The SSR revenue split was 80% from a remotely operated vehicles or RV business and 20% from our combined tooling and survey businesses compared to the 70.822 split respectively in the immediate prior quarter.
<unk> as we forecast sequential <unk> days on hire increased on standard seasonality and recovering offshore activity.
With an increase in days for both drill support and vessel based services based on higher were 14005 as compared to 11887 during the first quarter.
Our fleet use was 58% in drill support.
Support and 42% and vessel based services versus 64% and 36% respectively in the first quarter.
We maintained our fleet count at 250, <unk> systems, and our second quarter fleet utilization was 62% up significantly from 53% in the first quarter.
During the second quarter.
After we retired 5 of our conventional work class Rovs systems and replace them with 3 upgraded conventional world class systems and 2 interest work class Rovs systems that are currently engaged in renewables work.
Average <unk> revenue per day on hire up $8056 was 2% higher than average <unk> revenue per day on.
Higher of $7.874 achieved during the first quarter.
At the end of June we had <unk> contracts on 73 of the 126 floating rigs under contract or 58% market share, which was flat with the quarter ending March 31, 2021, when we had <unk> contracts.
78 of the 135 floating rigs under contract.
Subject to quarterly variances, we continue to expect our drill support market share to generally approximate 60%.
Turning to manufactured products sequentially, our second quarter 2021, adjusted operating income declined on lower segment revenue.
Adjusted operating income margin decreased to 1% in the second quarter from 4% in the first quarter of 2021 as the lower revenue decrease the ability to leverage our cost base.
Activity in our mobility solutions or non energy business remained muted during the second quarter of 2021.
Our manufactured products backlog.
<unk> from 32021 was $315 million improving on our first quarter backlog of $248 million our.
Our book to Bill ratio was 1.3 for the 6 months ended June 32021, and was <unk> 8 for the trailing 12 months.
Offshore projects group <unk> second quarter 2000.
<unk> adjusted operating income declined as compared to the first quarter of 2021, despite a meaningful increase in revenue.
Revenue benefited from ongoing field activities in several projects in Angola, and a seasonal increase in intervention maintenance and repair or EMR work in the Gulf of Mexico.
The sequential decline in adjusted operating.
'twenty margin from 10% in the first quarter of 2021% to 7% in the second quarter of 2021 was primarily due to unplanned downtime and related costs associated with the Angola riser less light well intervention project, which was partially offset by higher <unk> activities in the Gulf of Mexico.
Integrity management and digital solutions, our MBS sequential adjusted operating income was higher on a 19% increase in revenue.
Seasonal activity and the startup of several new multiyear projects contributed to the revenue increase continuing efficiency improvements, including utilization of field personnel resulted in adjusted operating income margin increased.
Increasing to 7% in the second quarter of 2021 from 5% in the first quarter of 2021.
Our AD Tech second quarter 2021, adjusted operating income improved from the first quarter of 2021 on a 20% increase in revenue adjusts.
Adjusted operating income margin of 18% was better than forecast due to project.
And favorable rate base adjustments.
Adjusted unallocated expenses of $33 million was was slightly lower sequentially due to lower expense accruals related to incentive based compensation forfeitures.
Now I'll address our outlook for the third quarter of 2021.
1 we are projecting a decline in our consolidated adjusted operating results on moderately lower revenues with adjusted EBITDA in the range of $50 million to $55 million we.
We expect commodity prices to support good activity levels in our energy segments, particularly for short cycle work.
From the third quarter of 2021 as compared to the second quarter.
We expect relatively flat adjusted operating profitability in our energy segments to be more than offset by lower than by lower AD Tech adjusted operating results and higher unallocated expenses.
For our third quarter 2000, 22021 operations by segment as compared to the second quarter of 2021.
Our SSR.
We are projecting relatively flat activity and adjusted operating profitability in our RV survey and tooling businesses with similar RV utilization as compared to the second quarter.
Our adjusted EBITDA margin is anticipated to remain consistent with the prior several quarters.
From manufactured products, we anticipate relatively flat revenue and.
And operating profitability.
Board activity continues to look encouraging and our energy products businesses. However activity continues to lag in our mobility solutions businesses.
<unk>, we forecast lower revenue and relatively flat adjusted operating results, we expect Gulf of Mexico <unk> activity through.
We remain at a relatively high seasonal level through the third quarter.
The range was slight well intervention project and field support contract in Angola are expected to continue for a portion of the third quarter.
Our expectation for relatively flat adjusted operating results takes into account the above described levels of activity and improved uptime as.
Adjusted for the second quarter.
Brian Yes, we expect both revenue and adjusted operating results to remain relatively consistent from the second quarter with the second quarter of 2021.
Per AD Tech, we forecast lower revenue and lower adjusted operating results due to a change in project mix as compared to the second quarter.
Unallocated expenses are expected to be in the mid $30 million range due primarily to increased information technology infrastructure costs and normalized accruals for incentive based compensation.
Directionally for our full year 2021 operations by segment as compared to 2020 for SSR, we expect.
As compared to adjusted operating results to improve on slightly higher revenue <unk> days on hire are projected to remain relatively flat year over year with minor shifts in geographic mix.
Results for tooling based services are expected to be flat with activity level generally following <unk> days on hire.
Survey results are expected to improve on growing international activity.
SSR forecasted adjusted EBITDA margin is expected to remain relatively consistent with what we achieved in 2020.
For Rovs, we expect our 2021 service mix to remain about the same as the 2020 mix of 62% drill support and 38% vessel based services with higher vessel based percentages during.
Expectedly higher second and third quarters.
We estimate overall RV fleet utilization to be in the mid to high 50% range again with higher seasonal activity during the second and third quarters.
We continue to forecast that our market share for drill support market will remain around 60% for the foreseeable future as of June.
June 32021, there were approximately 28 oceaneering rovs onboard 37 drilling rigs with contract terms expiring by year end.
During the same period, we expect 33 of our Rovs on 40 floating rigs to begin to begin new contracts.
From manufactured products.
Alex we forecast lower operating results due to the long cycle nature of this business and reduced customer and capital commitments during 2020.
Operating results in 2020 benefited from contracts awarded in 2019 that allowed for beneficial cost absorption through the year.
In 2021, we expect the improved order intake seen during.
During the first half of the year will drive increased activity in the fourth quarter.
Our non energy mobility solutions businesses can continue to see reduced activity and order intake. However confidence is building that we will see order intake improvement in 2022.
We forecast that our operating income margins will be in the low to mid single digit range for.
And the segment book to Bill ratio will be in the range of 1.1 to 1.5 for the full year.
For <unk>, we forecast a meaningful annual improvement in adjusted operating results on higher revenue.
Good vessel utilization is expected to continue through the third quarter with operators remaining active with EMR work in the Gulf of Mexico.
The year. However, we also expect a typical seasonal decline in activity during the fourth quarter R.
Our expectations for utilization are driven by the commodity price environment, which remains supportive to short cycled callout work, which is the majority of the work performed in this segment.
Utilization of our vessels, both owned and chartered has improved to the point that.
It may lead us to enter into spot charters on an as needed basis. This year.
For <unk>, we forecast improved operating results on higher revenue, we expect second half 2021 revenue to continue to benefit from incremental multiyear contracts that began during the first half of 2021.
We forecast that our adjusted operating income.
Margin will continue to improve through the end of the year as we continue to drive more efficiency in this business adjusts.
Adjusted operating margins are expected to average in the high single digit range for the year.
Per AD Tech, we expect improved adjusted operating results on increased revenue with an annual adjusted operating margin approximately the same as that achieved in 2000.
20 <unk>.
We continue to see good growth opportunities in all 3 of our primary asset business lines defense subsea technologies vessel modification and repair services and space systems.
Our estimated organic capital expenditure total for 2021 remains between 50 and $70 million. This includes approximately 30.
$35 million to $40 million of maintenance capital expenditures in $2000.15 million to $30 million of growth capital expenditures.
We forecast, our 2021 income tax payments to be in the range of 40% to $45 million.
We continue to expect to $28 million in cares Act tax refunds. However, the timing of receipt of these payments.
Whether in 2021 or 2022 is uncertain.
Unallocated expenses are expected to average in the mid $30 million range per quarter for the second half of 2021.
Now turning to our balance sheet.
Our net debt position improved during the second quarter as we repurchased 30.
$5 million from our 2024 senior notes and we're able to build our cash balance by $13.3 million.
We had $456 million of cash and cash equivalents at the end of the second quarter.
We continue to expect free cash flow generated in 2021 will be in excess of that generated in 2020.
We.
We are well positioned to address the maturity of our 2024 senior notes and will continue to be opportunistic and proactive as to how and when we will address the remainder of this pending maturity.
And as a reminder, we continue to have our $500 million undrawn revolver available to us until November of 2021 and $450 million available until Jan.
2023.
In summary, based on our first half financial performance and expectations for the second half of 2021, we are raising our adjusted EBITDA guidance to a range of $200 million to $225 million for the full year. This confidence despite ongoing uncertainties associated with COVID-19.
Annual range from our strong first half of 2021 performance positive client interactions supportive oil price expectations and growing backlog.
As stated in my opening remarks confidence is returning to the energy services industry, and especially to those companies that can help their customers with carbon reduction goals.
This combined with an <unk>.
Expected rebound in our mobility solutions businesses and continued growth in our government businesses underpinned our general expectation for increased activity levels over the next several years.
Our focus continues to be on generating positive free cash flow in 2021.
Retaining and attracting top.
Top talent.
<unk>, our 2024 debt maturity, maintaining financial flexibility and growing our businesses by leveraging our technologies and capabilities into new markets.
We appreciate everyone's continued interest in oceaneering and will now be happy to take any questions you might have.
Okay.
As a reminder, if you would like to ask a question Press Star then the number 1 on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from Ian Macpherson.
Good morning Rod.
Sure.
As always.
Just a high level.
<unk>.
Visibility for deepwater activity going into 2022, and I know it's too.
Microscopic to look at your seasonal RSV utilization, so you'll have more robotics.
Thanks, Tivoli seasonally in Q2, and Q3, but I would imagine that we have an uptrend.
In deepwater rig count visibility going into next year can you talk about tenders.
Tendering and what types of.
Discussions youre, having with good operators regarding their needs for her.
Ladies and.
Into the into next year, just generally and what flavor of growth we might consider at this point the market broadly.
Yes.
It does feel good and I'll, just say that we can.
We can feel it but there is no. There is no it's not like somebody dropped the start flag I will say that.
It's a it's a gradual increase.
We don't we don't we can't necessarily see a huge spike in the number of floating drilling rigs.
But I think the optimistic thing we see is that we're going through contract renewals we're seeing.
Seeing longer contracts again, we're seeing people looking for.
For.
<unk> got 2 years deals, where we were going well by well in the past. So I would say that that's that's kind of that's kind of a tone is that yes. It's optimistic yes, we see it going up.
It's going to be a ramp up its not theres not going to be any big spikes.
Okay that makes sense for now and it sounds like it's probably.
1 of them may be biased firm up from that as we go from there.
The back half of the year.
And then I think I think every earnings call for every company in the World. This quarter has asked about how you are coping with.
Margin by months.
Think of that as being particularly relevant per ads.
But you seem to have pretty sanguine.
Segment outlook.
To talk about any.
Potential storm clouds there.
How youre addressing those issues.
And the margin.
Thanks Scott.
Going forward, yes.
I think the steadiness of our contracts and the way the AD Tech work is contracted that's actually that's actually pretty.
Slated from from a lot of those changes because it's been more predictable.
I think where you're going to see it is as we start to contract new work.
Some of these new orders come in.
Generally we've been we've been well.
Again, well protected in the sense that we had back to back with the large suppliers on the <unk>.
Manufactured products and things like that but.
I think youre going to continue to see just like everybody else you know this whole great. The great resignation, we're going to we're all going to see pressure on labor costs people costs, that's going to be something that we have to watch.
And we have to kind of signal to our customers early but again, it's happening to everybody. So I don't.
Well I don't think theres going to be a lot of pushback when they start to see that those costs go up.
<unk>.
The typical things we just we're just watching very carefully fuel at a lot of those things on the boats boats.
That gets most of that gets passed along as we go so I don't see any big maybe cliffs out.
But but there is generally there is generally a rise like you said cost of almost everything is going up slightly.
Slightly so it's just a matter of making sure that we signaled early to the customers and we build it into the contracts.
That's great. Thanks, Rob I'll pass it over.
Thanks Ian.
There. Your next question comes from the line of Mike <unk>.
Hello.
Hey, good morning, everyone. Good morning, Mike.
Okay.
I guess, maybe from a little early to start thinking about 2022.
Kind of commented a little bit on there I was wondering if you could just kind of pump brown in the Capex budget next year.
As you sit here today is there anything that you would flag.
We should be aware of that could require capital next year as we think about capex over the medium term.
How should we be thinking about that.
Percentage of sales.
And then.
The Capex budget that we're seeing this year is that that's sustainable.
Or is it do you think it kind of moved up from there.
I think you have to watch a few things Mike It's a great question.
As you expected, it's hard to answer but.
But to think about things like you saw you saw the turnover.
In the RV that we talked about in this meeting.
We are upgrading our.
<unk>, we're adding capability to the to the conventional rovs, but we're also modifying some of them to work in the renewables market.
Longmei continue that that's good stuff, it's related to contracts that's related to the shift to.
Shifting to renewables, so I think thats. Good I also like investment in things like freedom.
Some of these changing market opportunities those are the growth capital.
Expect we'll keep spending on.
And then and then the thing that's harder to predict is do we have to pick up assets for.
For a contract or something like that I think those are going to be if they come if those kind of opportunity.
Please come they're going to come with upside on revenue and upside on EBITDA. So.
I think probably if you said does it is it sustainable.
Not really if youre growing.
But as it.
Can you can you keep it more like a percentage of revenue like you said if you are growing I would say yes. Thank.
So youre kind of Triangulating on it the right way.
Perfect.
A helpful answer.
And then.
Our leverage ratio down to 1.5 times.
You guys seem to be more confident that the 2020 for maturity was under control then kind of any any point in the past couple of years per share.
Is there a target leverage that you all can share with us that you are looking for at this point in the cycle and then.
As we get there I know you mentioned some cash.
Growth Capex could you just talk about other capital allocation priorities that you could have heading into next year.
Yes, Michael.
<unk>.
Yes.
Certainly thank obviously the lower the leverage ratio that is more comfortable we are as a company, but I think it's getting that fine balance of.
Being able to have some growth capex.
And our plan for next year mean, yes, Rod you know as a sustainable.
Yes, if youre not growing but I think.
It's looking for those niche technologies looking for opportunities to find other ways, we can grow into adjacent markets from where we are today.
I think thats, where we would probably spend a little more on the capex.
I don't think its going to be 1 that would change our overall leverage ratio significantly from where we're at today, though.
So I think the 1.5 is certainly given our guidance for free cash flow this year and the expectation that you can start reading through into next year.
It should be reasonably well there so that would.
Point towards a potential lower leverage ratio.
<unk>.
Good day, Mike.
I would just add when we talk about the capital.
The ROE V fleet being the RV fleet being fairly stable as the drill support market is stable that that's that renewal and replacement that tends to go on but.
And get on the good side, if you start start to.
No other fleets that we would like to be operating people movers.
Hospital.
Our <unk> for hospitals and manufacturing plants.
Those would be the kinds of things that I would speak to is the good upside.
Yes, and I think the other part of that leverage ratio. We're always looking at is what is the runway.
And as the maturity is really come due.
They were due tomorrow.
Would lead us to maybe a slightly different conclusion.
With the debt maturities into 'twenty, 4 and 'twenty 8.
It gives us confidence we have the ability to deal with.
Thanks Al.
When clients plus.
Next question comes from the line of Taylor Zurcher.
Hey, good morning, Thanks for taking my question.
See the 2021 EBITDA guidance range move higher.
I guess my question is from for the back half from here it sounds like you've got some better visibility towards.
Healthy seasonally adjusted level of activity for <unk>.
<unk> work in the Gulf of Mexico.
Just thinking about the high end and the low end of that range I could just help frame for us what the primary sort of wildcards would be or drivers on getting to the high end and low end of that range is it primarily.
The level of <unk> activity, you're seeing.
Or that you will see or are there. Some other factors that could play a role as well.
You got it.
Remember <unk> runs through both subsea robotics and LPG. So if we see a longer season, where there are more boats on the water more RMR work that.
Net net seasonal that seasonal.
Activity kind of extending out really strong through the third quarter and even bleeding into the fourth quarter you could see you see the high end of the guidance the guidance coming from both the subsea robotics business and LPG, So that's giving us that bleeds into both of those businesses.
Got it.
Merely follow ups you touched on this a bit in Q&A already but if I heard you correctly you added to interest systems in Q2, and I'm just curious how conversations with customers are progressing around some of these new technologies like interest and the freedom and Liberty vehicles.
It sounds like you can do these.
These retrofits in a pretty capital efficient manner, but just curious what we should see moving forward in terms of market adoption of those sorts of technologies.
Like the way you said that because number 1 they're.
There is a retrofit component, but if I had to rank. These the interest demand is here now because that is that is really related to that.
Shallow water work that's happening in the renewables business. So it is front and center and Thats why you see us talking more and more about adding those units. The other side of it is the compatibility with the interest with a lot of the support systems that we have the.
The over boarding system.
Winchester lowers into the water the control cabins.
And so everything else, it's got a lot in common with our standard system. So we can.
The ultimate recycling program. We can we can you use a lot of existing hardware to put an interest system out which reduces the capital cost and increases our speed to be able to deliver so that's good and it's the 1 kind of again from the center Liberty would.
And Liberty is the resident system again, it's got a lot of similarities with the traditional RV system.
A little more capex intensive in the sense that it's got a battery pack and it's got to believe that comes with it and some other things again, probably nearer to fruition because it's really.
You talked about technical readiness level.
It is closer to the things that are already being done today. So we see the customers confidence with that kind of technology is up from the front and center and then and then freedom again offers a lot of kind of new capability and with new capability. The technical readiness is a little more challenging more things to prove more trials to run.
But but the capability unlocks is even bigger than perhaps the other 2 so I'd kind of put them there about.
Timing wise proven easy stuff on the <unk> system that really makes a difference in the daily operating.
Net of doing things that you didn't know that you could do with the freedom on the other end it all it.
Place together and it gives us some encouraging signs that over time.
All of these things are going to be happening in their own on their own time cycle, which kind.
Delivers over time in a really nice way.
Great. Thanks for the answers.
Thanks Taylor.
Yes, no fair enough.
Questions at this.
Time.
Thank you very much well since there are no more questions I'd like to wrap up by thanking everybody for joining the call. This concludes our second quarter 2021 conference call have a great day.
This concludes today's conference you may now disconnect.
Thank you.
Thank you.
All kind of.
Yeah.