Oceaneering International - Q1 2024

Transcript

Operator (participant)

Welcome everyone to Oceaneering's 2024 Q1 earnings conference call. My name is Ludy, and I will be your conference operator. All lines have been placed on mute to prevent any background noise. There will be a question and answer period after the speaker's remarks. With that, I will now turn the call over to Hilary Frisbie, Oceaneering Senior Director of Investor Relations. Please go ahead.

Hilary Frisbie (Senior Director of Investor Relations)

Thanks, Ludy. Good morning, and welcome to Oceaneering's Q1 2024 results conference call. Today's call is being webcast, and a replay will be available on Oceaneering's website. Joining us on the call are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments, Alan Curtis, Senior Vice President and Chief Financial Officer, and Mark Peterson, Vice President, Corporate Development and Investor Relations. Before we begin, I would 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 also include non-GAAP financial measures.

Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our Q1 press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Rod Larson (President and CEO)

Good morning, and thanks for joining the call today. In our earnings release yesterday, I stated that I was encouraged by our Q1 results. Let me give you a little more color. In the Q1 of 2024, we achieved our highest Q1 EBITDA since 2016. Remotely operated vehicles or ROV revenue per day on hire for the quarter exceeded $10,000 for the first time since the Q4 of 2014. We saw continued solid order intake and bidding activity, as well as increased customer engagement with respect to our MaxMover counterbalance forklift. These factors all reinforce our expectations for sustained multi-year growth in our traditional markets, as well as future growth in developing markets, all of which I find encouraging as we continue to progress our strategic plan.

As you probably noted in our earnings release, we have changed our results comparison to year-over-year instead of quarter-over-quarter, as we've done in recent years. We believe this more accurately highlights the foundational growth that we see across our businesses and removes the seasonal impact that comes with sequential comparisons. Today, I'll focus my comments on our performance for the Q1 of 2024 and our consolidated and business segment outlook for the Q2 and full year of 2024. Now, for our results. For the Q1, we reported net income of $15.1 million or $0.15 per share on revenue of $599 million.

These results included the positive impact of $2.2 million in foreign exchange gains and the associated $0.8 million of tax effects, along with $0.2 million of expenses related to discrete tax adjustments. Adjusted net income was $13.9 million or $0.14 per share. Our consolidated Q1 operating income, as compared to Q1 2023, was up 37%, and revenue was up 12%, with increases in all of our business segments, except for the Offshore Projects Group or OPG. For the Q1 of 2024, our consolidated adjusted EBITDA of $61.7 million exceeded our guidance range and consensus estimates on better-than-expected activity levels across our businesses. These results, when combined with our backlog and current levels of bidding activity, support our unchanged guidance for the year.

Now, let's look at our business operations by segment for the Q1 of 2024 as compared to the Q1 of 2023. SSR operating income was 31 higher on an 11% increase in revenue and an improved operating income margin as compared to the Q1 of 2023. EBITDA margin also improved over the same period last year to 31% from 29%, largely due to improvements in ROV revenue per day on hire, utilization, and days on hire. Average ROV revenue per day on hire of $10,009 was 9% higher. Utilization improved slightly to 64%, and days on hire increased 2%.

Operator (participant)

Excuse me, ladies and gentlemen, your conference will resume momentarily. Please stand by. Excuse me, ladies and gentlemen, please continue to stand by. Your conference will begin momentarily.

Rod Larson (President and CEO)

Hey, my apologies. It looks like our line was disconnected, so not knowing for sure where we were cut off, I'm going to start from the beginning, and I'll do my best to be expeditious. Thanks for your patience. In our earnings release yesterday, I stated that I was encouraged by our Q1 results. So let me give you a little more color. In the Q1 of 2024, we achieved our highest Q1 EBITDA since 2016. Remotely operated vehicles, or ROV, revenue per day on hire for the quarter exceeded $10,000 for the first time since the Q4 of 2014. And we saw continued or solid order intake and bidding activity, as well as increased customer engagement with respect to our MaxMover counterbalance forklift.

These factors all reinforce our expectations for sustained multi-year growth in our traditional markets, as well as future growth in developing markets, all of which I find encouraging as we continue to progress our strategic plan. As you probably noted in our earnings release, we have changed our results comparison to year-over-year instead of quarter-over-quarter, as we've done in recent years. We believe this more accurately highlights the foundational growth that we see across our businesses and removes the seasonal impact that comes with sequential comparisons. Today, I'll focus my comments on our performance for the Q1 of 2024 and our consolidated and business segment outlook for the Q2 and full year of 2024. Now for our results. For the Q1, we reported net income of $15.1 million or $0.15 per share on revenue of $599 million.

These results included the positive impact of $2.2 million in foreign exchange gains and the associated $0.8 million of tax effects, along with $0.2 million of expenses related to discrete tax adjustments. Adjusted net income was $13.9 million or $0.14 per share. Our consolidated Q1 2024 operating income as compared to the Q1 of 2023 was up 37%, and revenue was up 12%, with increases in all of our business segments except for our Offshore Projects Group, OPG. For the Q1 of 2024, our consolidated adjusted EBITDA of $61.7 million exceeded our guidance range and consensus estimates on better-than-expected activity levels across our businesses. These results, when combined with our backlog and current levels of bidding activity, support our unchanged guidance for the year.

Now, let's look at our business operations by segment for the Q1 of 2024 as compared to the Q1 of 2023. SSR operating segment was 31% higher on an 11% increase in revenue and an improved operating income margin as compared to the Q1 of 2023. EBITDA margin also improved over the same period last year to 31% from 29%, largely due to improvements in ROV revenue per day on hire, utilization, and days on hire. Average ROV revenue per day on hire of $10,009 was 9% higher. Utilization improved slightly to 64%, and days on hire increased 2% to 14,536. ROV fleet use during the Q1 of 2024 was 66% in drill support and 34% in vessel-based activity, compared to the 65% and 35%, respectively, for the same period of 2023.

The revenue split between our ROV business and our combined tooling and survey businesses as a percentage of our total SSR revenue, was 78% and 22%, respectively, compared to 77% and 23% in the same period of 2023. At the end of March, we had ROV contracts on 88 of the 149 floating rigs under contract, or 59%. This was slightly lower than the prior year, when we had ROV contracts on 90 of the 148 rigs under contract, or 61%. Turning to Manufactured Products, compared to the Q1 of 2023, operating income improved to $13.2 million, an increase of 17% on a 15% increase in revenue.

Our backlog on March 31, 2024, was $597 million, an increase of $151 million over the Q1 of 2023. Our book-to-bill ratio of was 1.3 for the trailing twelve months, as compared to our book-to-bill ratio of 1.27 for the same period last year. OPG Q1 2024 operating income and operating income margin declined as compared to the Q1 of 2023, due primarily to expenses and downtime associated with dry docks during the quarter. Excluding the dry dock impact, operating income margin would have approached the 5% achieved in the Q1 of 2023.

For IMDS, Q1 2024 operating income improved from the same quarter in the prior year on a 16% increase in revenue and a flat operating income margin of 5%. Our ADTech Q1 2024 operating income increased by $4.3 million as compared to the Q1 of 2023, with an 8% increase in revenue and improvement in operating income margin from 13% to 9%. Unallocated expenses of $38 million were below our guidance of $40 million for the quarter, but higher than the same period last year. In the Q1 of 2024, we utilized $69.7 million of cash in operating activities and $25.5 million in capital expenditures, resulting in negative free cash flow of $95.2 million.

Consistent with the past few years, our cash balance declined during the Q1, with an ending cash position of $355 million and no borrowings under our secured revolving credit facility. Now I'll address our outlook for the Q2 of 2024 as compared to the Q1 of 2024. On a consolidated basis, we expect our Q2 2024 results to improve significantly, with adjusted EBIT in the range of $80 million-$90 million on a mid-teens % increase in revenue. Our expectations for our Q2 2024 operations by segment are: for SSR, we are projecting higher activity levels across our ROV survey and tooling businesses, with higher segment operating profitability. ROV days on hire are expected to increase in both drill support and vessel-based activities, achieving utilization in the upper 60- to low 70% range.

SSR EBITDA margin is forecast to be in the low 30% range. For Manufactured Products, we anticipate revenue to increase in the low teens % range, with operating income margin to approximate our Q1 margin, leading to improved operating profitability in the Q2 of 2024. For OPG, we anticipate significantly higher revenue and operating results. Operating income margin is expected to be in the low-to-mid teens % range in the Q2 of 2024. This anticipation is based on a seasonal uptick in intervention, maintenance and repair, or IMR, activity, primarily in the Gulf of Mexico and West Africa, coupled with the absence of the dry dock impacts incurred in the Q1. For IMDS, we expect relatively flat revenue and operating profitability.

For ADTech, we expect higher revenue and lower operating income, with operating margin in the low-teens% range on a shift in project timing and mix. Unallocated expenses are expected to be in the $40 million range in the Q2 of 2024. Directionally, for our full year 2024 operations by segment as compared to 2023, we expect for SSR, we forecast improved operating results on a low- to mid-teens% increase in revenue. SSR EBIT margins are projected to increase to the mid-30% range in the H2 of the year, leading to a margin in the low- to mid-30% range for the full year. For ROVs, we expect ROV days on hire and revenue per day on hire to increase year-over-year.

Our 2023 service mix of 63% drill support and 37% vessel-based services is expected to remain relatively the same in 2024, with higher vessel-based utilization during the seasonally higher second and Q3s. We estimate overall ROV fleet utilization to be in the high 60 to low 70 percent range, again, with higher seasonal activity during the second and Q3s. We continue to forecast that our market share for the drill support market will remain in the 55%-60% range for the foreseeable future. For manufactured products, we expect operating income to increase on a greater than 10% increase in revenue, with a slight improvement in margin. This expectation is based on our year-end 2023 backlog of $622 million and continuing strength of bidding activity in our energy businesses.

We expect segment book-to-bill ratio to be in the range of 1.1-1.3 for the year. In our mobility solutions business, we are seeing active customer interest as evidenced by recent interactions at the LogiMAT and MODEX trade shows and subsequent engagements.... In order to meet anticipated demand and lower product cost, we have selected a global contract manufacturing company for our MaxMover counterbalance forklift product and are currently implementing a production line, which we expect to be fully operational in 2025. For OPG, we continue to expect operating results to improve on a slight decrease in revenue, with lower expected international activity being largely offset by increased utilization in the Gulf of Mexico. Overall, for 2024, OPG operating income margin is expected to be in the mid-teens range for the year.

For IMDS, we project slightly higher operating income results on increased revenue. We forecast year-over-year operating income margin to remain in the mid-single digit range for the year. For ADTech, operating income results are expected to be slightly higher on higher revenue. Operating income margin is expected to be in the low teens range for the year. On a consolidated basis, our estimated organic capital expenditure total for 2024 remains between $110 million and $130 million. This includes approximately $50 million-$60 million of maintenance capital expenditures and $60 million-$70 million of growth capital expenditures. We forecast our 2024 cash income tax payments to be in the range of $80 million-$90 million.

Net interest expense is projected to be in the range of $24-$28 million, as we continue to benefit from investing our cash and from lower gross debt. Unallocated expenses are expected to average $40 million per quarter for the remainder of 2024. In summary, our Q1 performance and refreshed outlook for the year give us confidence to maintain our 2024 adjusted EBITDA guidance range of $330 million-$380 million. It is worth noting that at the midpoint of our $110-$150 million free cash flow guidance range, we expect to generate free cash flow of $225 million, somewhat ratably over the remainder of the year.

As mentioned on our last call, we understand our shareholders' desire for return of excess capital, and in response, we have prepared a share repurchase strategy. For 2024 and beyond, we remain focused on our growth strategy in energy markets and increasing our participation in longer-term non-energy growth markets. We appreciate everyone's continued interest in Oceaneering. We look forward to seeing you at our Investor and Analyst event, showcasing our robotics technology on May ninth. And if you've not already RSVP'd, please do so. Now, before I take some questions, I want to take a moment to acknowledge a significant milestone. Today is Mark's last earnings call. Since assuming the dual roles of Investor Relations and Corporate Development in 2018, a time when agility and adaptability were critical, Mark has been instrumental in shaping and sharing Oceaneering's narrative.

His commitment to embodying our core values and telling our story has not only enriched our team, but has also contributed to developing and strengthening our relationships with our investors and analysts. Mark, your insights and dedication have left an indelible mark on our organization, and while we'll miss your guiding presence and keen wit, we look forward to hearing about your new adventures in retirement. Thank you for your steadfast leadership and many contributions to Oceaneering. Now, I'll be happy to take any questions you might have.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Kurt Hallead from The Benchmark Company. Your line is open.

Kurt Hallead (Head of Global EnergyHead of Global Energy, The Benchmark)

Hey, good morning, everybody.

Rod Larson (President and CEO)

Morning, Kurt.

Kurt Hallead (Head of Global EnergyHead of Global Energy, The Benchmark)

Hey, Mark, try not to be too bored in retirement, all right?

Mark Peterson (VP of Corporate Development and Investor Relations)

Yes, sir.

Kurt Hallead (Head of Global EnergyHead of Global Energy, The Benchmark)

All right. So, congratulations on that. So, hey, I think, appreciate all the information and insight and everything else. My curiosity still revolves around your mobile robotics. I know that you had, you know, a number of different, you know, increase in order intake over the course of, you know, 2023. I just want to get an update as to, you know, what that order book looks like through the Q1. And then maybe just also touch on, you know, some of the benefits you expect to get from outsourcing the manufacturing for that business. Thanks.

Rod Larson (President and CEO)

Sure. So kind of on the order book, we don't have anything that we've prepared to announce sort of on big new orders, but I will just say, there's been a pretty steady flow of customers coming in and looking at the technology and getting pretty excited. I would expect just, you know, we've had... The first customer was pretty big about taking big orders or making big orders right away. What we're seeing on the next few will be trial orders. You know, they'll pick up a handful to try, and then the bigger orders come thereafter. But we are getting ready for that. Even the order book we have today, you talked about the contract manufacturer.

Some of that will be built in our facility, but some of it will be built by the contract manufacturer. That's why we're getting that production line up. And what we really expect is, number one, that they build things en masse, so they're really good at sourcing very effectively, you know, leveraging their buying power and finding vendors that they have relationships with to get costs down on the individual components. And then just being super efficient on the line as they put things together. The other thing I love about that is it frees us up-...

You know, to take the capacity we have now and preserve that for R&D to build, you know, the next version and the version after that, and the auxiliary equipment that go with the forklift. So we'll be using our space for more pilot build and prototype build, while somebody else is doing the production build. So it really helps us go faster.

Kurt Hallead (Head of Global EnergyHead of Global Energy, The Benchmark)

Okay. Appreciate that color. Maybe just staying on that topic again, just wanted to get a general sense to, you know, whether or not you've had taken another whack at what the total addressable market for, you know, the, the specific, you know, robotics businesses that you're looking at?

Rod Larson (President and CEO)

You know, we've pegged that market. We've talked about 5 growing to 8, I think, over the next few years. That's where... I don't know that we've seen a big change in what we think the total market is, but I do feel like we're getting more confidence that the addressable market, meaning the portion that we think people are willing to convert to an autonomous forklift versus a driver forklift, I think that continues to grow. So, you know, kind of watch this space. This is one of the leading, kind of, leading-edge products.

And the types of customers we're seeing and the people, you know, our list of kind of industries and places where these might go actually is growing as we see that interest develop over these two trade shows we were at, but also people who have contacted us directly. So I think that's the biggest part, is how much can we actually convert to an autonomous product?

Alan Curtis (SVP and CFO)

Yeah. I think we're still seeing, you know, market research suggesting that 15-25% CAGR rate in this space, which is certainly a growth market.

Rod Larson (President and CEO)

Yep.

Kurt Hallead (Head of Global EnergyHead of Global Energy, The Benchmark)

Okay. Thanks, guys. Appreciate it.

Operator (participant)

Your next question comes from the line of Bill Austin from Daniel Energy Partners. Your line is open.

Bill Austin (Managing Director in Event Operations and Management)

Hey, guys. Thanks for taking my question.

Rod Larson (President and CEO)

Morning, Bill.

Bill Austin (Managing Director in Event Operations and Management)

Morning. Then I was gonna follow up a little on Kurt, but I'll talk a bit about, you know, on the last call, you talked about Manufactured Products and how items with improving pricing will take a while to move through the backlog. I think you had previously said the H2 of this year, we could see some improvement on margins. Is pricing continuing to improve for those things, you know, that you're booking today? And how should we think about margin runway over the next couple of years based on the, you know, better pricing rolling through the businesses?

Rod Larson (President and CEO)

I'll talk a little bit about the change and let Alan kind of wax on the, on the, on the margin change. But yeah, we do see it, and we see the, the backlog, the quality of the backlog, the pricing is good. You know, it kind of depends on... One of the things that it depends on is we're pretty well booked in the plants. So what we see comes in places like Grayloc or Rotator or some of the other manufacturing areas, which are good margin, but smaller, you know, smaller numbers. So we got to see those things fill in. We got to see some of the small gaps fill in in those businesses because those opportunistic sort of business bits of work are the ones that really bring margin, but we definitely see it happening.

The other thing I'll offer is, you know, we talk a lot about what's happening, especially in the umbilical plants, and we don't, you know, we still haven't cleanly broken out the mobile robotics business. And so there's some of the ebbs and flows of the mobile robotics business that can sometimes make it hard to see what's going on in the energy products business. But that's what I'd say. If we were to break it out, you'd be able to see that more clearly, that we do see a pretty steady march. But, Alan, I'll turn that over to you.

Alan Curtis (SVP and CFO)

Yeah, no, I think it captures a lot of it, Rod, in the sense of, you know, one of the things we see, Bill, is while it's great to have the visibility in the backlog, one thing that we have is a little bit of a nuance when we get into the accounting for, I'll say, steel tubes, which are long-lead materials. You saw in Q4, we had a little bit lower margin in this business segment. As we took those revenues and basically no margin on those installed materials, we saw the benefit of that as we put them through the production phase this time and added more value. We had higher margins and expect that to continue here.

In the back half this year, I would expect to see from a margin perspective, you know, good, strong revenues, but we will also probably be adding in more of these steel tubes on some new projects that we'll be commencing at that point in time. So margins could come down just a little bit, but that's a good indicator for 2025 at the same time, 'cause we'll, we'll start to progress them more through the factory at that point in time, is, is what we're currently seeing now. In full in production, it, it could be a little bit of a, a benefit. So that's what we're weighing right now.

Bill Austin (Managing Director in Event Operations and Management)

Okay. Well, thanks. And then, you know, one more on, I know, just a little on the Subsea Robotics. You know, you guys did a demo for the U.S. Navy and Defense Innovation Unit in Norway. Do you guys mind talking a little bit more about that? You know, you had phase one, and when could phase two begin? And, you know, do you have any framework around, you know, what the potential revenue opportunity for that type of thing could look like for you guys in the future?

Rod Larson (President and CEO)

Well, we're in phase two, and phase two is kind of where we go from what the product does to, you know, to more about some of the other things they may want it to do. So that phase two part is this, you know, this quarter. That business, it's just a little bit hard to predict. It's, you know, because we don't know. They haven't really talked about scale, but it could be something that is significant. I'll just put it that way, that it's not gonna—they're not really talking about a one or a two. Well, you know, depending on how far they wanna take that, you know, we'll know more when they decide.

Part of it isn't that they're being coy with us, it depends on the capabilities. So obviously, the more capabilities we can deliver, the more applications and the more demand. So we'll kind of watch this space, but I mean, thanks for bringing it up. It is a pretty exciting thing. We talk a lot about, you know, what's going with the MaxMover and the forklift on the terrestrial OMR, but on the subsea, these different applications for Freedom is really broadening sort of the aperture of not just energy, not just sort of our typical work, but that some of this defense work could be pretty sizable.

Bill Austin (Managing Director in Event Operations and Management)

Great. Well, I'll, yeah, you got my questions. I'll let, I'll let some other people ask some questions. Thanks a lot, guys.

Rod Larson (President and CEO)

Thanks, Bill.

Operator (participant)

Thank you. Once again, if you would like to ask a question, simply press star followed by the number one on your telephone keypad. We have a follow-up question coming from Kurt Hallead from Benchmark. Your line is open.

Kurt Hallead (Head of Global EnergyHead of Global Energy, The Benchmark)

Hey, hey, guys. So you, you referenced, you guys referenced, that you have discussed or established a shareholder return of cash to shareholder program and talked about a share repurchase. Is... You know, what kind of additional details can you provide on that?

Rod Larson (President and CEO)

Yeah, I guess I don't really have an algorithm to share, but I'll kind of share with you what we're looking at, Kurt, is we're really looking at, you know, the cash generation. Obviously, we got some comments back on the cash burn in Q1. I hope people aren't overly focused on that because we always have a cash burn in the Q1. One of the things that, unfortunately, we've seen in a couple of the past few years is that that didn't really come back until Q4. So we saw, you know, the big drop in Q1, and you had to wait till Q4 to see if it looked like we're gonna hit the number. We don't see it being as backloaded this time.

We see that happening more ratably. And as it happens, that gives us the comfort level to work with the board and establish a repurchase number. Of course, I'm gonna compare that cash available to the share price and making sure that it's a good deployment of capital, and also against a couple, you know, some of the, especially the organic investment opportunities we've got on the plate, and we'll go back and forth. But we really... I mean, I just, I guess I would share there, that's a lot of stuff that says, you know, it's a hard maybe, but there is a desire to do it.

We got, you know, there's support from management, and there's certainly support on our board, but we just need to make sure that we're making the right decisions. We're being somewhat opportunistic about taking those shares at the right price and at the right time.

Kurt Hallead (Head of Global EnergyHead of Global Energy, The Benchmark)

Okay. Appreciate that. And then, then follow up on the ROV side of the business, you guys referenced the increase in pricing for the quarter. Typically, the ROV pricing does track pretty closely to the deepwater rig rates, and I think the last time rig rates were, you know, $400,000-$500,000, I think your ROV rate was $12,000 plus. So just wanted to get a general sense from you guys on, you know, what kind of continued momentum you would expect to see in terms of ROV pricing.

Rod Larson (President and CEO)

You know, I think we're still seeing some. I mean, you know, we've talked about they have to work through the system and, you know, just even this year, we've negotiated some changes in rates, so some of that is still coming through. You know, when you get to that higher number, I would say it's—we gotta correct the leading edge to the average. The leading edge rates, we've seen above 12, even today, depending on where we're operating in the world. So, you know, I think that we're on track to get back to, you know, kind of like rig rates.

When rig rates get back to where they were, I think ROV rates are gonna get back on average to where they were, and we talked about going back to Q4 of 2014. So we're definitely tracking that way with some movement left. So I expect the averages are gonna continue to go up through this year, and that's good news. I, the other thing I like to talk about when we talk about it is, we wanna talk about low points to high points in our own business versus percentages, because the rig rates went down a higher percentage than ROV rates. And so when we bring them back up, with rig rates double, for example, ROV rates aren't gonna double from the bottom.

But we do expect to, you know, we do expect to get very close, and if not, exceed the ROV rates we've seen in the past.

Kurt Hallead (Head of Global EnergyHead of Global Energy, The Benchmark)

Gotcha. Great. Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I would like to turn it back to Rod Larson for closing remarks.

Rod Larson (President and CEO)

Hey, thank you. And again, my apologies for the interruption in the middle of the broadcast. Thank you very much for everyone who stuck with us and dealt with maybe a little bit of repetition. But since there are no more questions, I'm gonna thank Mark one more time. Mark, it's been a great run. Thanks for all your help, and just thank you all for joining the call. This concludes our Q4 2024 conference call. Have a great day.

Operator (participant)

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.