Q2 2023 Oceaneering International Inc Earnings Call
[music].
My name is Brian and I'll be your conference operator, welcome everyone to <unk> second quarter 2023 conference call.
All lines have been placed on mute to prevent any background noise. There will be a question and answer period after the Speakers' remarks.
With that I will now turn the call over to Mark Peterson, <unk>, Vice President of corporate development and Investor Relations.
Thanks, Brian Good morning, and welcome to Oceaneering second quarter 2023 results Conference call today's call is being webcast and a replay will be available on <unk> website joy.
Joining us on the call today are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments and Alan Curtis Senior Vice President and Chief Financial Officer.
Before we begin I would just like to remind participants that statements. We make during the course of this call regarding our future financial performance business strategy plans for future operations and industry conditions are forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Our comments today are also include non-GAAP financial measures.
Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our second quarter press release, we welcome your questions. After the prepared statements I will now turn the call over to Rod Hey, Good morning, everybody and thanks for joining the call today I'd like to begin by emphasizing that our business activity is increasing.
And demonstrating quantifiable improvements from accelerating deepwater and non energy market fundamentals here are a few supporting data points.
On a consolidated basis, we produced operating income of $49 2 million in the second quarter of 2023, our highest quarterly operating income since 2015.
For the first half of 2023, our energy segments generated an 18% increase in revenue and nearly a 100% increase in operating income as compared with the first half of 2022 or.
Our near term rolling sales funnel at 632023 was more than 35% greater than at the same time last year.
And inbound orders year to date 2023 versus 2022.
<unk> up over 20%.
We expect strong offshore market dynamics to continue for the foreseeable future with robust bidding activity supporting our expectation for growing backlog and increasing activity in our energy segments market dynamics are also favorable for our aerospace and defense technology segment or AD Tech and autonomous mobile robotics business or.
Sure.
Based on our year to date results.
And our current expectations for the second half of 2023, we are narrowing our adjusted EBITDA guidance by raising the lower bound of the previous range and adjusting the range higher for our projected free cash flow.
We now expect to generate between 275 and $310 million of adjusted EBITDA and $90 million to $130 million of free cash flow for the full year.
Now I'll focus my comments on our performance for the second quarter of 2023, our current market outlook Oceaneering has consolidated and business segment outlook for the third quarter of 2023, and Oceaneering has revised consolidated 2023 outlook, including our revised adjusted EBITDA and free cash flow guidance ranges. After these comments.
I'll then make some closing remarks before opening the call to your questions.
Now to our second quarter summary results.
Our second quarter 2023 results increased significantly compared to the first quarter of 2023, as we generated adjusted EBITDA of $74 8 million.
This result was slightly outside the bottom end of our guidance range provided at the beginning of the quarter, primarily due to negative impact from higher project costs in our entertainment business and the delay of project starts and our offshore projects segment our OBG.
During the second quarter of 2023, all of our operating segments generated higher revenue and with the exception of our manufactured products segment. Each of our operating segments reported operating income growth led by increases in our <unk> and subsea robotics or SSR segments.
Operating results benefited from seasonal and market influences that resulted in an 11% sequential growth in consolidated revenue.
<unk> to the first quarter of 2023, our energy segments in aggregate led by LPG and SSR posted a 13% revenue increase and significantly improved operating results in the second quarter of 2023.
Our non energy segment AD Tech also produce significantly improved operating income as compared to the first quarter of 2023.
Consolidated operating income increased by $22 $4 million in the second quarter of 2023, and 84% increase as compared to the first quarter of 2023 with all of our operating segments generating positive operating income and positive EBITDA.
Now, let's look at our business operations by segment for the second quarter of 2023.
SSR revenue increased over 10% and operating income increased significantly as expected with healthy demand for Rovs and tooling services being slightly offset by some project delays and related vessel preparation costs in our survey business.
SSR EBITDA margin of 30% improved slightly as compared to the first quarter of 2023 <unk>.
The SSR revenue split was 78% from our remotely operated vehicle or RV business and 22% from our combined tooling and survey businesses compared to the 70 723 split respectively in the immediate prior quarter.
As expected <unk> days on hire were sequentially higher by 13% with 16032 in the second quarter as compared to $14 228 during the first quarter of 2023.
There were increases for both drill support and vessel based services. Our fleet use was 61% in drill support and 39% and vessel based services versus 65% and 35% respectively in the first quarter.
We maintained our fleet count at 250, <unk> systems, and our second quarter fleet utilization was 70% up from 63% in the first quarter.
This is the first quarter since our RMB fleet was reduced to 250 systems at the end of 2019, where utilization its average at or above 70%.
Average <unk> revenue per day on hire of $9077 for the quarter was 1% lower than the first quarter of 2023.
The.
On an average <unk> revenue per day on hire was primarily due to increased equipment standby rates, which do not include crewing charges I should emphasize the increasing amount of standby revenue reflects improving contract terms related to the idle time that were virtually nonexistent in recent years. This is accretive to revenue and does not.
Diminish our forecast for improving average revenue per day in 2023.
At the end of June we had RMB contracts on 91 of the 147 floating rigs under contract or 62% market share an improvement over the 61% recorded for the quarter ending March 31 2023.
Turning to manufactured products. This segment generated second quarter 2023, operating income of $10 $6 million on an 11% sequential increase in revenue revenue increased primarily due to the receipt of certain umbilical materials that did not contribute to current quarter operating results.
Operating results declined modestly as compared to the first quarter of 2023 with project losses in our entertainment business offsetting consistent positive energy related manufacturing performance.
Our manufactured products backlog on June 32023 declined to $418 million compared to our March 31, 2023 backlog of $446 million bidding activity remains strong in our energy and <unk> businesses. Our book to Bill ratio was <unk> 79 for the six months ended June 32.
23, and $1 one nine for the trailing 12 months and is expected to be in the range of one two to one four for the full year of 2023.
<unk> second quarter, 2023 revenue and operating income increased significantly compared to the first quarter of 2023, primarily due to greater activity and utilization across all geographic regions and partially offset by certain planned installation work in the Gulf of Mexico shifting into the third quarter of 2000.
23.
Operating income margin improved to 13% in the second quarter of 2023 from 5% in the first quarter of 2023 as a result of higher overall utilization driven by seasonal demand.
Integrity management, and digital solutions or Mds second quarter 2023, operating income was higher on a 5% increase in revenue as compared to the previous quarter and.
An increase in scope on several international projects contributed to the revenue increase operating income margin of 6% improved slightly from 5% recorded in the first quarter of 2023.
Our AD Tech second quarter 2023, operating income increased as compared to the first quarter of 2023 on a 3% increase in revenue operating income margin of 12% increased as expected from the 9% margin achieved in the first quarter of 2023.
Unallocated expenses of $36 million remained relatively flat compared to the first quarter of 2023.
Now I'll address our outlook for the third quarter of 2023.
On a consolidated basis, we expect a sequential increase in third quarter 2023 results on a high single digit percentage increase in revenue.
Our operating segments are expected to post a low to mid teens percentage increase on adjusted EBITDA results as compared to the second quarter of 2023. However, based on our improved full year 2023 performance outlook third quarter 2023, unallocated expenses are forecast to increase to the mid $40 million range as we.
Anticipate higher accruals as performance based incentive compensation to be booked during the quarter.
As a result consolidated adjusted EBITDA is expected to be in the range of $75 million to $85 million for the third quarter of 2023.
For the third quarter of 2023 operations by segment as compared to the second quarter of 2023 for SSR, we are projecting higher revenue and operating profitability in our RV survey and tooling businesses with RV utilization remaining in the high 60% to low 70% range on continuing robust offshore activity.
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SSR EBITDA margin is anticipated to improve as compared to the second quarter of 2023 with margins remaining in the low 30% range. We continue to see a trend of improving contract terms and pricing in our RV business.
For.
Factored products, we anticipate lower operating income on a mid teens percentage increase in revenue. We expect operating income margin to decrease slightly due to project mix changes and to be in the mid single digit range.
For <unk>, we expect a low teens percentage increase in revenue and higher operating income with Marge operating margins in the mid teens range activity levels remain high increasing slightly and international work and remaining stable in the Gulf of Mexico.
For <unk>, we expect revenue to be relatively flat with operating income margin remaining in the mid single digit range.
For AD Tech, we forecast improved operating income and operating income margin on a modest increase in revenue.
Directionally for our full year 2023 operations by segment as compared to 2022.
<unk>, we expect operating income to improve significantly on high teens percentage increase in revenue.
<unk> days on hire are projected to increase year over year with minor shifts in geographic mix results for tooling based services are expected to increase with activity levels generally following <unk> days on hire.
Survey results are also expected to improve on growing geophysical activity, primarily in the back half of 2023.
SSR forecasted EBITDA margin is expected to show an increasing trend through the second half of the year, averaging in the low 30% range for the full year.
Yes.
For Rovs, we expect our 2023 service mix to remain about the same as 2022 mix of 61% drill support and 39% vessel based services with higher vessel based percentages during the seasonally higher second and third quarters.
We estimate overall ROE V fleet utilization to be in the mid to high 60% range for the year again with higher seasonal activity during the second and third quarters.
Subject to quarterly variances, we continue to forecast that our market share for drill support market will remain in the 55% to 60% range for the foreseeable future.
As of June 32023, there were approximately 23 opening our Rovs on board 21 floating drilling rigs with contracts expiring at or before year end 2023 during.
During the second half of 2023, we expect 46 of our Rovs on 38 floating rigs to begin new contracts lasting beyond year end.
For manufactured products, we forecast a significant increase in revenue and operating income results as compared to 2022.
Although we expect lower operating income margin during the second half of the year as a result of changes in project mix. We continue to expect operating margin for the full year to improve over 2022, averaging in the mid single digit range for the year.
Bidding activity in our energy and <unk> businesses remains robust with high levels of quotation activity expected to continue into 2024, we continue.
To expect our full year 2023 book to Bill ratio to be in the range of one two to one four.
For LPG, we expect slightly higher revenue significantly higher operating income results and improved operating income margin to the low to mid teens range driven by more efficient vessel utilization and increased international activity.
Given our expectation for continuing and high vessel demand for the foreseeable future. We acted during the second quarter of 2023 to secured chartered vessel capacity for multiple years.
I want to deviate from my full year comments for a moment to talk in a bit more detail about our fourth quarter expectations for LPG.
<unk> on our most recent forecast we now have visibility into increased levels of international activity and expect operators to remain active in the Gulf of Mexico moderating the familiar seasonal decline typically seen in the fourth quarter.
We expect the higher demand levels to support pricing with operating incomes in the mid to high teens for the fourth quarter of 2023.
For <unk>, we forecast relatively flat operating income results on modestly higher revenue with operating income margin remaining in the mid single digit range for the year.
For AD Tech, we expect higher operating income results on increased revenue with 2023 operating income margin in the low teens percentage range. We remain excited about our AD tech businesses position in the defense and government markets and see good growth potential for this segment again in 2024.
On a consolidated basis, our estimated organic capital expenditures total for 2023 remains the same between 90 and $110 million. This includes approximately $45 million to $50 million of maintenance capital expenditures and $45 to $60 million of growth capital expenditures.
We forecast, our 2023 tax or cash income tax payments to be in the range of $65 million to $70 million.
Net interest expense is projected to be approximately $20 million in 2023, as we continue to benefit from investing our cash at higher interest rates and unallocated expenses are expected to average in the high $30 million range for the fourth quarter of 2023.
Now turning to our balance sheet and liquidity, our cash balance at quarter end was relatively unchanged from the prior quarter at $504 million.
During the quarter, we received a cares act tax refund of $22 $7 million, which was offset by increased working capital usage, we are increasing our guidance range for free cash flow generation to $90 million to $130 million for the full year.
This guidance change reflects the inclusion of the cares act tax refund, which is partially offset by higher amount of working capital required as a result of our improved outlook for the fourth quarter of 2023.
We expect meaningful free cash generation during the second half of 2023, which is consistent with the last several years.
Liquidity remains strong with no borrowings under our senior secured revolving credit facility and no loan maturities until November 2024, with significant levels of free cash flow expected to be generated again in 2023, we remain well positioned to address our 2024 debt maturity while also.
Funding strategic growth initiatives in energy and non energy markets.
In summary, based on our first half performance current backlog and our prospects for the remainder of the year. We are narrowing our adjusted EBITDA guidance for full year 2023 by raising the lower bound of the previous range and now expect to generate between $275 and $310 million of adjusted EBITDA.
Beyond 2023, we believe the supportive macro indicators associated with our energy businesses remain in place and we anticipate higher levels of offshore energy activity for the foreseeable future. This combined with good growth opportunities in our AD Tech and mobility solutions businesses underpins our expectation for continuing improvement in our.
<unk> performance.
We remain confident in our ability to transform oceaneering as the energy transition continues to involve evolve.
This confidence is underpinned by our industrial knowledge and technology development in renewable energy and non energy markets.
Our key focus areas continue to be remaining dedicated to the safety and wellbeing of our employees and customers generating substantial positive free cash flow, providing innovative and value added solutions to our customers generating efficiencies through increased asset utilization and expanding operating margins and remaining focused on.
ESG principles for the benefit of our employees our customers our shareholders and our communities. 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 you have a question. Please press the star followed by the number one on your Touchstone songs, you will hear a pump and I'll, let Jim your request.
If you would like suites all your request. Please press the star followed by the number itself.
One moment please for the first.
<unk>.
First question comes from do Kim with Barclays. Please go ahead.
Hi, good morning.
You called out two items.
Negatively impacted results during the quarter the project delays in OTT, and then project costs in the entertainment business.
Micro market it sounds like the LPG project delays really just timing related and shifting from Q to Q, but.
Can you expand a bit on the project losses in the entertainment business was this more of a one off situation or is this something you expect could linger for the next couple of quarters.
No it's directly related to a two one single project. So it's something that we feel like is it doesn't have overhang into the rest of the year.
Okay. Okay. Thanks for clarifying.
And then.
Just wanted to.
Yes.
About your expectations for orders in.
Manufactured products.
In the second half of the year you did around new appointment times book to Bill in the first half.
We maintained fully.
<unk> book to Bill guidance of 1214.
So on our math it would require.
It looks like a near doubling of the oil.
Order inbound in the second half just to meet the low end of that guidance.
So first I get that.
Right.
Could you talk about the confidence level you have.
The big step up in second half orders coming through.
Yes, Andy this is Alan.
One of the things we look at is in that side of the business there tends to be larger scale kind of episodic awards from time to time and that's what we're seeing as we added several visibility to several awards here in the back half of year that will move the needle for us.
So it was a timing kind of matter.
With the customer need.
Needing to be achieved in when they will actually place. The order. So we do feel good about it we do have pretty strong pipeline of projects and bids outstanding that we think will support that.
Okay. Okay.
Okay, great. Thank you very much for all the color.
Thanks, Ed.
The next question comes from Kurt <unk>.
Benchmark.
Okay.
Hey, good morning, everybody.
Good morning, good afternoon, I guess.
Got it.
Yes, exactly so.
Hi, So just one.
I want to make sure.
Kind of give some understanding of dynamics right. So in terms of your RF business. It tends to track what happens in both deepwater drilling and to a certain extent.
Subsea infrastructure and while we've seen a flurry of recent contract announcements by offshore drillers in terms of rising day rates.
The extension are felt longer duration.
A contract so just kind of curious when you look back on a cycle periods last time rates were at these levels.
RV rates were well north of.
$11000, a day, which would for another 20 plus percent upside from here. So is there any reason to think that the linkage between offshore rig rates and <unk> rates of change.
No I think we're spot on in.
The numbers are thrown out leading edge prices are good it takes a while to run that through all our contracts I know we've talked about that before we really appreciate it win win rates were dropping rate that we had this duration of contraction and it kept us healthy for a longer period of time same way coming back and it just it just takes a little while to get it.
All the way up there, but but we don't see any headwinds in tracking the same way and we talked a little bit about the about the day rates.
Currently in and a little bit of change this quarter really in some ways is good news because we're getting more days in the sense that our contracts are improving and we didnt get paid standby during the downturn now we're getting paid standby so while while it increases the overall revenue. It also increases the denominator it add some days that didn't even exist before.
So it looks a little dilutive to the revenue per day, but it is still adding revenue and it's still adding days. So it's good stuff.
That's a better contract terms got yet so.
Other dynamic right is beyond just the day rate element.
As contract duration right, so like with any other company, whether it doesn't matter what sub sector I'd say and you got some white space Youre going to have some.
Some cost absorption issues right. So it looks like Youre getting some.
Yes, Greg being contracted nine to 12 months it looks like we're getting a series of rigs that are going to be three three years, if not more so last time I check you can't run a rig without an RFP and as long as your contract duration extend can.
Can you help us understand how that helps your margin.
It definitely helps the margin because if youre getting those longer durations pleasure getting standbys, we talked a lot about churn and tougher years, where the time between contracts the time between between even wells, we werent getting paid when we get into some of these longer term contracts you get paid either a day rate or a standby rate every day.
And so so all of that again back to contract terms, both the standby time and the longer durations, all add up to better better numbers better better margins for Rovs.
Okay, and then coming back to the prior question about manufacturing products side. It looks like you're going to have an acceleration in orders in the back half of the year.
We've had other companies that participate in subsea like Sci talk about significant order bookings out through 2025, and increasing visibility out beyond that.
The biggest business in manufacturing products, if I'm, not mistaken is umbilical, which kind of ties into subsea.
Infrastructure.
So I was wondering if you look at the dynamics right now the backlog coming in.
How do you feel about the.
The margins in backlog that Youre going to book from this point forward.
What does that mean for margin improvement going out into next year.
Yes, if you look at how we are viewing that today certainly the contracts we're bidding it current or better margins than what we did last year. So we are seeing improvement in pricing.
Currently.
Start to impact.
You indicated kind of a back half of 'twenty, four and more than 25, even in some of them are going into 2006. So we are starting to see this as that long cycle business that we have that.
Benefits from these contracts I mean long lead materials that we're ordering are 12 months out of some of these contracts. So we will start to take revenue recognition on these until we get all the parts and for the most part and can start to assemble the umbilical. So visibility is increasing in the longer term late 'twenty.
25.
Part of what we have looking at the margin progression you described.
As we've talked about one storage contract right now that.
We're working through with the customer this year.
Certainly a higher margin perspective that will be rolling off and we'll get back to more of a traditional manufacturing margin next year.
So.
I think it's also like.
Yes, just to add just one more thing on manufactured products as we talked about bookings going way out into the out years for umbilical plants being loaded some of our higher margin businesses.
Great lock in rotator and some of that work. We've got we've got some capacity left and so just increased subsea activity allows us to to sweat those assets load those plants up and do more work at that higher margin to which which bodes well for the overall performance of the group.
So I mean do you have line of sight to double digit margins in this business given given the stuff.
Stuff, that's coming through backlog.
I think we certainly have line of sight to the double digit margins. In fact, if you look at Q1, we were low double digits there.
When we look at some of the non traditional things, we do with mobility solutions, specifically with the.
Mobile robots that were working on.
They are actually margin dilutive today, we are investing some money there to to build that baseline business.
Good traction with some customers right now, but we are building. The first units. So you would expect first units are going to cost a little bit more.
So we do look to get some efficiency gains through some operational excellence programs getting more volume and those will help the overall margin as well.
As we move forward.
So again it is a little bit of it is a little bit of a drag right now as we invest but the good part is the pipeline looks great and so we expect it will be able to get the benefit of that investment.
Okay.
Total total addressable market you book those.
Automated forklifts in the first quarter of this year I believe.
From your initial order so what do you think that total addressable market is for that business in particular.
Just on that forklift market.
And the $3 billion range when we look at some of the market and market research kind of things that are out.
Sure.
It's a very large market.
Is growing at the same time, so we're very interested in how we can continue to apply.
<unk> technologies that we already are very good out with Rovs and other robotic applications into this market space.
Okay, great great. Thanks, I'll turn it over I appreciate those answers. Thank you.
Thanks Kurt.
Our next question comes from David Smith.
Energy partners.
Good morning, most of my questions have been asked but I would like to circle back to your comments.
In the prepared remarks about securing charter basketball capacity for multiple years.
I was wondering if you could give any color on the number of vessels.
Any type of duration or if theres any.
The graphical concentration and really wondering is this a.
Our reactions are shrinking spot market availability.
Do any of these charters maybe lineup with potential project opportunities opportunities that might have some rail duration.
Yes.
It's a moving it's a moving number but let's just say it's three plus.
And some of that is some of that is for Gulf of Mexico spot market to your point, because we need to make sure. We've got availability, but others are targeted towards specific international opportunities. We've got international opportunities right now that we're that we've been awarded in Guyana, and the Black Sea and West Africa.
<unk>.
Things that things that were working on for the Caspian. So the international market looks really strong for us, but we need to we need to lock in some of that capacity because the spot market overseas is a little more challenging because you don't know if the boat is going to be where you need it when you need it. So we're going to make so we've had to make some commitments there as well.
It makes perfect sense. Thank you. Thanks.
Thanks, a lot.
There are no further questions at this time I'll now turn the call over to Mark.
Alright, well since there are no more questions I just wanted to thank everybody for joining the call and this concludes our second quarter 2023 conference call have a great day.
This concludes today's conference call. We thank you for participating and ask that you. Please disconnect your lines.
This concludes today's conference call.