Q3 2022 Oceaneering International Inc Earnings Call
Summary results.
Our third quarter results were driven by improved offshore activity and pricing, particularly in the Gulf of Mexico, which ticked up further during the quarter, although the Gulf of Mexico stood out our energy segments also saw broad based activity increases in a number of international markets, including Asia Africa and Australia.
We produced $66 $6 million of free cash flow and $77 6 million of adjusted consolidated EBITDA, which exceeded our guidance and consensus estimates for the third quarter offshore.
Offshore activity drove significant operating improvements in our energy businesses, which were led by our subsea robotics or SSR and offshore projects group OBG segments. In addition increased manufacturing throughput led to improved operating margins and our manufactured product segment. We also saw an improvement in our government focused businesses after experience.
The effects of negative timing during the second quarter of 2022.
For the full year of 2022, we expect our adjusted EBITDA to be within the narrowed range of $215 million to $240 million.
And continue to expect positive free cash flow in the range of $25 million to $75 million.
And I'd like to go off script for a moment and talk about our revised EBITDA guidance range. I think it is important to emphasize that the midpoint of our guidance range does not include us achieving the anticipated product sale in our in our entertainment business achieve.
Achieving this product sale along with further improvements in pricing and utilization will drive our results to the top end of the 2022 range.
The revised range does consider the Q3 beat but we're being cautious around the timing of the products.
So the offshore recovery is clearly underway.
With increasing emphasis on both energy security and development of the cleanest safest and most reliable energy sources I expect positive market fundamentals to support our energy focused businesses for years to come.
In addition, with increasing competition for and scarcity of available labor are mobile and subsea robotics businesses are experiencing heightened levels of interest as automation lowers onsite personnel requirements and enables remote supervisory control.
So now let's look at our business operations by segment for the third quarter of 2022.
Subsea robotics or SSR revenue and operating income both increased as expected when compared to the second quarter with higher activity levels for Aro <unk> survey and tooling services SSR EBITDA margins of 31% improved over the second quarter of 2022, as new contract pricing and utilization efficiencies our increase.
Tingly being reflected in our results.
As disclosed in our recent press release, we received strong SSR order intake of $300 million during the third quarter of 2022.
The SSR revenue split was 77% from our RV business and 23% from our combined tooling and survey businesses the same as in the immediate prior quarter.
Sequential <unk> days on hire increased modestly with good levels of offshore activity.
With an increase in drill support days essentially flat vessel based services days on hire were 15408 as compared to 14631 during the second quarter, a 5% increase our fleet use was 60% in drill support and 40% and vessel based services versus 57% and 43%.
<unk>, respectively in the second quarter.
We maintained our fleet count at 250, <unk> systems, and our third quarter fleet utilization was 67% an increase from 64% in the second quarter.
Average RV revenue per day on hire of $8468 was 2% higher than average <unk> revenue per day on hire of $8278 achieved during the second quarter.
At the end of September we had a 59% drill support market share with <unk> contracts on 82, the 140 floating rigs under contract a slight improvement over the 58% recorded for the quarter ended June 32022, when we had RMB contracts on 80 of the 137 floating rigs under <unk>.
Contract.
Turning to manufactured products sequentially, our third quarter 2022 operating results improved despite an 11% decrease in revenue operating income and related margin percentage of $4 3 million and 5% respectively improved measurably from the second quarter of 2022, due primarily to increased manufacturing throughput.
And our subsea hardware businesses.
Activity levels have improved in our non energy mobility solutions businesses, and we are increasingly optimistic about the fundamentals of these businesses headed into 2023.
Order intake during the quarter was solid with manufactured products backlog, increasing to $365 million on September 32022 from $335 million on June 32022, our.
Our book to Bill ratio was one $1 seven for the nine months ended September 32022, and it was one point for the trailing 12 months.
Offshore projects group or LPG third quarter 2022, operating income increased as compared to the second quarter of 2022 on a 31% increase in revenue strong seasonal activity and intervention and installation work primarily in the Gulf of Mexico drove the improved results.
Operating income margins remained in the mid teens at 13%, but declined slightly from the 15% margin achieved in the second quarter due to slight changes in service mix.
The Gulf of Mexico continue to see high levels of demand and pricing for vessel based services during the third quarter of 2022.
Integrity management, and digital solutions or <unk> third quarter 2022, operating income declined slightly from the preceding quarter on 2% less revenue.
Revenue declined as customers, particularly in Europe delayed inspection programs and kept facilities running to support energy security priorities operating income margin of 5% decline from the 6% recorded in the second quarter of 2022, due primarily to the continuing impact of employee wage inflation.
Aerospace and defense technologies or AD Tech third quarter 2022, operating income increased significantly from the second quarter on essentially flat revenue operating income margin of 15% improved significantly from the second quarter of 2022, reflecting recovery of prior quarter pre contract costs and favorable project mix.
Unallocated expenses of $39 million were less than expected and slightly lower than the second quarter of 2022.
Now I'll address our outlook for the fourth quarter of 2022.
On a consolidated basis, we believe that our fourth quarter 2022, EBITDA will decline on a relatively flat revenue as compared to our third quarter results in the fourth quarter of 2022, while we anticipate a seasonal slowdown we still expect relatively good activity in our offshore markets broadly for the fourth quarter of 2022 as compared to the third quarter.
We expect slightly lower activity in our energy segments lower operating profitability in our AD Tech segment and increased unallocated expenses.
For our fourth quarter 2022 operations by segment as compared to the third quarter of 2022 for SSR, we're projecting slightly lower revenue and operating profitability <unk> days on hire are forecast to decline slightly as compared with the third quarter with slightly higher drill support days being more than offset by a seasonal decline in vessel.
Days, we expect good survey activity to continue during the fourth quarter, our forecast assumes overall RV fleet utilization to be in the mid 60% range SSR. Adjusted EBITDA margin is anticipated to remain in the low 30% range for the fourth quarter of 2022.
As of September 32022, there were approximately 16 oceaneering Rovs onboard 12 of the 14 floating rigs with contract terms expiring by year end during.
During the same period, we expect to have 39 Rovs on 35 of the 53 floating rigs starting new contracts.
For manufactured products, we anticipate an increase in revenue and operating profitability as compared to the third quarter with operating income margin in the mid single digit range. This guidance does not include the anticipated product sale within our entertainment business. Although we remain confident that this transaction will ultimately close.
Award activity continues to look promising and our energy products businesses and we are seeing a definite increase in interest in our mobility solutions businesses. We continue to forecast a book to bill ratio of between one one and one three for the full year of 2022.
For <unk>, we expect significantly lower revenue and operating profitability in the fourth quarter of 2022 due to typical lower seasonal activity that said fourth quarter activity levels are still expected to be much stronger during than during the same quarter over the last several years with revenue expected to be similar to the second.
Quarter of 2022.
Fourth quarter 2022, operating income margin is expected to be slightly lower than what we achieved in the third quarter.
Brian , Yes, we expect slightly lower revenue and operating results as compared with the third quarter of 2022 for.
<unk>, we forecast modestly higher revenue and lower operating income as compared to the third quarter. We expect operating income margin to decline during the fourth quarter. As a result of the absence of pre contract cost recovery that occurred in the third quarter and higher indirect expenses.
For the fourth quarter, we expect operating income margins to be in the high single to low double digit range unallocated expenses are expected to be in the mid $30 million range.
For the full year of 2022, we expect to generate adjusted EBITDA within the narrowed range of $215 million to $240 million our guidance for organic capital expenditures remains in the range of $70 million to $80 million and our guidance for cash income tax payments remains in the range of 40% to $45 million we.
To expect to generate positive free cash flow between 25% and $75 million for the full year of 2022.
And now turning to our free cash flow and debt position.
Our cash flow from operations for the third quarter of 2022 was $85 9 million and was the primary driver in the increase in our cash and cash equivalents to $428 million as of September 32022 at the end of the third quarter, our net debt position stood at $274 million with.
Our strong cash position and additional liquidity from our Undrawn revolving credit facility, we remain well positioned to address the maturity of our 2024 senior notes.
Now looking forward to 2023 supportive commodity prices and the increasing importance of energy security underpin our expectations for a strong five year outlook and our offshore energy businesses.
With energy transition expected to require an all of the above solution across energy sources, we are well positioned to support our customers and enabling the production of cleaner safer and more reliable energy from traditional sources at the same time. We are also currently supporting our customers and the evolving offshore renewables market, where we see strong growth in the medium.
Term.
National Security priorities support our expectation for continued modest growth in our government focused businesses in aggregate, we see solid fundamentals supporting each of our current businesses over the next five years. While we also continue to grow the company by leveraging our core robotics expertise into new energy and mobile robotics markets.
Accordingly, looking into 2023 year over year, we are anticipating increased activity and improved operating performance across all of our operating segments led by gains from SSR and OTG.
At this time, we forecast EBIT in the range of $260 million to $310 million in 2023, driving healthy levels of cash flow from operations. In 2023, we expect capital expenditures to be higher than 2022, as we continue to focus on opportunities generating the highest returns both in our traditional businesses.
<unk>, new high growth markets, but to be clear, we remain very focused on capital discipline and expect to generate positive free cash flow in excess of $100 million.
We will provide more specific guidance on our expectations for 2023 during the year end reporting process.
Sure.
So in summary, based on our year to date financial performance and expectations for the fourth quarter of 2022, we are narrowing our adjusted EBITDA guidance to a range of $215 million to $240 million for the full year.
We continue to see incremental growth in all of our segments in 2023, despite the challenges facing the global current global economy that may suppress energy demand.
We believe that energy security priorities combined with a lack of investment in traditional energy sources over the past. Many years, we will continue to prompt operator spending across all energy sources, even in a challenging near term environment and we expect heightened focus on national security issues to foster modest growth in our government focused businesses. These factors combined.
Bind with the emerging opportunities to apply robotics expertise into new markets, both in energy and non energy further underpin our general expectation for increased activity levels over the foreseeable future.
Our focus continues to be on maintaining a strong safety culture and safety performance maintaining.
Maintaining our financial and capital discipline Gen.
Generating significant positive free cash flow.
Managing our 2024 debt maturity, attracting and retaining top talent and increasing our pricing and margins to generate a fair return for our world class services and products.
Optimizing each of these priorities positions us for success during the energy transition, while providing increasing opportunities to provide returns for our shareholders.
We appreciate everyone's continued interest in oceaneering and will now be happy to take any questions you may have.
Thank you ladies and gentlemen, we will now begin the question and answer session. So do you have a question. Please a question star followed by the one on your Touchtone phone.
You will hear today, Tom prompt acknowledging your question. Thank you.
You are using a speaker phone please lift the handset before pressing.
First question comes from James Schumm with Cowen. Please go ahead.
Hey, good morning, guys congrats on a great quarter.
<unk>.
Just wanted to talk about the entertainment sale and manufacture products I mean, how confident are you that the sale occurs over the next six months like how likely is it.
I think we are very confident that we will be able to achieve it over the next six months and as I mentioned in the in my break.
It's just a matter of whether we can get that in by the end of the year. So that kind of is what we believe that the traditional business is it put us solidly at that midpoint, especially given the Q3 beat but but that sale would represent pushing us to the upside of our range.
Understood Okay.
And then the AD Tech business.
It seems to have been.
Victim of timing on some government projects. This year do you think this will be an ongoing issue or do you think it's resolved.
So I don't think its result for the government, let me be clear, but we were we were in a position where a lot of the work that we were we were either looking to tender a re tender.
Refund some of our.
Our current projects, we had a lot kind of riding on the first part of this year and we don't have the same situation next year. So we don't expect the same impact.
In the coming couple of quarters.
And is there any way that you can protect yourself and some of these.
Contracts with the government.
So sort of prevent.
I think the best thing we do is we have sort of a ladder of contracts right. If you think about it that way that we've got a number of contracts so that even though each contract in and of itself is lumpy, having a portfolio of them and having having a number of different products.
<unk> projects that we're working on sort of offsets any big swings in any given quarter or half.
Right right, Okay, well, thank you very much.
Thank you.
Ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
Next question comes from Samantha Hoh at Evercore ISI. Please go ahead.
Hey, guys.
Congrats on a nice quarter.
I was wondering on the SSR order that you announced and that $200 million.
Can you split that switch between drill support and vessel based services.
I don't have that top of hand, Samantha I think most of it is going to be drill support, though I mean, the preponderance of it is probably 80% just rough estimate.
Looking at at this point because some of these contracts are going out.
Up to five years I think in duration so.
We're not seeing any of that on a vessel at this point in time.
And I think Thats representative of the number of rigs that are coming on as I mentioned earlier. So so that those 35, new rigs coming on some of that is related to those new contracts.
And the other part of it Samantha that sometimes doesn't get as much attention as some of this is coming from our survey business, which rolls up into the SSR segment as well so sometimes it doesn't get as much fanfare, but we have seen an uptick in that activity as well.
Okay.
Just for the longer duration type contracts.
What sort of language.
Yes.
Pricing.
Cos frozen adjustment or things like that.
It's going to be contract ended I mean, many times, what we're trying to achieve is the ability to reprice or build in inflationary mechanisms. So that if we see labor increases those will be passed on to the.
Contract as well.
And the longer term one of the things that we count on to Samantha as new technology is the ability to up sell within these contracts and continue to rollover to new products, new technology and new opportunities. So if the contract runs long, we still have those things going on behind the scenes.
Sure.
And that's why your growth.
You highlighted that youre targeting.
Spanning robotics, thank you Simon.
Yes.
That all being rolled up into this.
Gentlemen, down the line.
Okay.
The capex spend as well.
That's a great question. So let me, let me break it out a little bit for you. When we talk about some of that automation and robotics inside of SSR. There is some so in the both the survey business and the and the <unk> business.
We have this opportunity to do more remote piloting we have the opportunity to do more freedom work Liberty work, where we've got a remotely operated vehicle or an autonomous vehicle. So that's largely what we talked about in the RV side.
And then when we get over to our mobile robotics business, which is inside of manufactured products. That's also exciting that's where we're talking about plant floor automation, we're talking about enhanced entertainment opportunities with ride systems, we're talking about people movers inside that automated forklifts things like that so you've got two different pieces that sit in today.
<unk> business is one of them focused on and I'm not going to just say energy, but focused on offshore and one of them focused on more terrestrial applications.
Okay.
Maybe just also.
Free cash flow guide I think.
It's kind of in line with what we were expecting.
Have a few.
Our expectations in terms of like free cash flow conversion from EBITDA longer term.
Is that.
40 ish range, what you think.
Achievable through cycle, how does that compare to what.
How do you think about it.
I'm going to I'm going to throw out an easy one first of all while islands kind of kind of look at it as numbers a little bit, but I think one of the things it's going to be dependent on is really how much how much investment we want to make because some of these robotics things that we just talked about are going to have some some capital requirements and so as we see sort of some op.
Opportunities come up there we may have some things those those best opportunities that we want to invest in but if we just look at the base of business I'll turn it over to Alan.
And I think you're Directionally correct when you look at.
Next year's midpoint guidance range of $285 million of EBITDA, we kind of set the.
It could be better than $100 million thereabouts on free cash flow, so that would imply a 35% or better.
Using the midpoint.
Okay and that does the low end of the.
Anticipated free cash flow.
Okay. Thanks, guys. Thank you for your time and congrats again.
Thank you.
Next question comes from Eddie Kim of Barclays. Please go ahead.
Hi, good morning.
<unk> had really good momentum here in <unk>, the past few quarters, especially on the on the margin front looking back historically 2011 to 2014 timeframe margins were kind of at the high teens level. In this segment and we are actually not that far away. So just given the the higher activity youre seeing could we.
Potentially see margins return to that high teens level in LPG maybe.
Maybe even next year and what would need to take place for that to happen.
So Andy I think a couple of things we will want to watch and they are both mix one of them is the mix of the kinds of work we're doing intervention work versus installation. So as we start to see we start to see more and more of that intervention work I think you see margins push up and then the other thing is the mix of international to.
Gulf of Mexico, and when we have the higher margins. It did imply a higher mix of things outside the Gulf more international work and.
We are pursuing more of that work. So I think as we start to see that mix shifts to more international yes will we will start to be exposed to those kind of margins again.
Understood and just.
All your vessels currently or in the Gulf of Mexico.
Okay.
Just wondering if thats correct.
No actually we had some vessels that charter in and operate over in West Africa.
So we have been.
Longtime we utilize the ocean intervention III as a charter vessel into the market there as well as we've had the island frontier working quite a bit this year as well so and we chartered in other ones on an as needed basis as well. So typically two to three vessels operating outside we.
Have a charter vessel that we have done some work.
I'll call it abandonment work as well our E com work in the North Sea. So we charter in on more of a project specific basis on an international scheme.
<unk> point that could be <unk>, it can be installation or it could be survey.
Got it got it understood. Thank you and then just quickly just shifting to the Rovs business day rates are now kind of at $8500.
Haven't seen that level for several years I mean, just given the momentum you're seeing here with all the contracts we have been seeing lately on offshore rigs plus the $300 million Award recently announced do you feel you have visibility in the dayrates potentially eclipsing the $9000.
At some point next year or do you think that would be a bit of a stretch at this point.
I think it might be within reach over time.
It really gets down to the number of Rovs that were going back in and trying to re price on all contracts.
At this point, but.
We look at those contracts that are really maturing in the next 12 months.
Are ripe for I'll say repricing.
And then we have other ones in 'twenty four so.
Can we get to 9000.
I think if we can get as many of them into 'twenty three as we can.
And how early in the year, we'd get them there.
Might have an exit rate closer to 9000, but the back end of the year would you mind my expectation for an exit rate not for an average for the year as I mentioned earlier when I was talking to some math I think upselling as part of that to get the day rates up.
Right now we're facing some FX headwinds so in the mix depending on how that goes that can give us some a little bit of help to if theres. Some balance there. So we've got a few different things and again, just like I said before the geographical mix matters on rovs as well, so, but Dallas point line of sight, yet, but we've probably got to get a couple of things to lineup for us.
Got it great. Thank you very much I'll turn it back.
Eddie.
Thank you there are no further questions you may proceed.
Alright, well since there are no more questions I'd like to wrap up by thanking everybody for joining the call and this concludes our third quarter 2022 conference call. Thank you.
Yes.
Ladies and gentlemen, this concludes our call for today, we thank you for participating and we ask that you. Please disconnect your lines.
Yes.