Oceaneering International - Q2 2024

Transcript

Operator (participant)

Welcome, everyone, to Oceaneering Second Quarter 2024 Earnings Conference Call. My name is Brittany, 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.

Hilary Frisbie (Director of Investor Relations)

Thanks, Brittany. Good morning and welcome to Oceaneering Second Quarter 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, and Alan Curtis, Senior Vice President and Chief Financial Officer. 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 second quarter press release. We welcome your questions after the prepared statements.

I will now turn the call over to Rod.

Roderick Larson (President and CEO)

Hey, good morning, and thanks for joining the call today. I'd like to begin by highlighting the continued strength that we're seeing in our energy-related business. Remotely Operated Vehicles, or ROV, average revenue per day utilized continues to increase, averaging $10,528 for the quarter, a key component in driving Subsea Robotics, or SSR, EBITDA margins into the mid-30% range. Consolidated bookings led by our energy business during the quarter exceeded $1 billion, with Manufactured Products backlog ending the quarter at $713 million. Additionally, quotation activity is still strong across our energy and Aerospace and Defense Technologies, or ADTech, businesses. Today, I'll focus my comments on our performance for the second quarter of 2024 and our consolidated and business segment outlook for the third quarter and full year 2024. Now, for our results.

For the second quarter, we reported net income of $35 million, or $0.34 per share, on revenue of $669 million. Adjusted net income was $28.6 million, or $0.28 per share. These adjusted results included the impact of $1 million of foreign exchange gains and $5.5 million of expenses related to discrete tax adjustments. Our consolidated second quarter 2024 operating income, as compared to the second quarter of 2023, was up 23%, and revenue was up 12%. All of our business segments achieved revenue increases with improved operating income in our SSR and Manufactured Products segments. For the second quarter of 2024, our consolidated adjusted EBITDA of $85.9 million was in line with our guidance range and consensus estimates. Now, let's look at our business operations by segment for the second quarter of 2024 as compared to the second quarter of 2023.

SSR operating income was 46% higher on a 15% increase in revenue and an improved operating income margin as compared to the second quarter of 2023. EBITDA margin also improved over the same period last year to 34% from 30%, largely due to improvements in ROV average revenue per day and continued cost control measures. Average ROV revenue per day utilized of $10,528 was 16% higher. Utilization was flat at 70%, and days utilized were relatively flat at 15,839. ROV fleet use during the second quarter of 2024 was 64% in drill support and 36% in vessel-based activity, compared to the 61% and 39%, respectively, in 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, which is the same split as in the second quarter of 2023.

At the end of June, we had ROV contracts on 89 of the 148 floating rigs under contract, or 60%. Turning to Manufactured Products, compared to the second quarter of 2023, operating income improved to $14.4 million, an increase of 35% on a 12% increase in revenue. Our backlog on June 30, 2024, was $713 million, an increase of $295 million over the second quarter of 2023, which gives us increasing visibility into manufacturing activity levels for energy products into 2026 and 2027. Our book-to-bill ratio was 1.56 for the trailing 12 months. Our Offshore Projects Group, or OPG, second quarter 2024 operating income and operating income margin declined as compared to the second quarter of 2023 due to the timing of pre-contract award costs that were expensed during the quarter, additional dry dock costs, and project mix.

Integrity Management and Digital Solutions, or IMDS, second quarter 2024 operating income and operating income margin were slightly lower than the same quarter in the prior year on a 16% increase in revenue. ADTech second quarter 2024 revenue increased by 4% as compared to the second quarter of 2023, while operating income decreased significantly to $7.2 million and operating income margin decreased to 7%. These decreases were due to a reserve related to a contractual dispute that was taken during the quarter and to lower-than-expected activity levels in our space systems business, predominantly related to the Extravehicular Activity Services, or xEVAS, space suit contract. Unallocated expenses of $39.7 million were in line with our guidance for the quarter. Now, I will address our outlook for the third quarter of 2024 as compared to the second quarter of 2024.

On a consolidated basis, we expect our third quarter 2024 results to continue to improve sequentially, with adjusted EBITDA in the range of $95-$105 million on a low- to mid-single-digit percentage increase in revenue. Our expectations for our third quarter 2024 operations by segment are: for SSR, we're projecting slightly higher activity levels across our ROV, tooling, and survey businesses, with slightly higher segment operating profitability. ROV days utilized are expected to increase in both drill support and vessel-based activities, achieving utilization in the low 70% range. SSR EBITDA margin is forecast to be in the low- to mid-30% range. For Manufactured Products, we anticipate revenue to increase in the low teens percentage range, with lower operating income and operating income margin.

This projection is based on our expectation of receiving materials that will yield lower margin revenue and ongoing costs associated with implementing our mobile robotics growth strategy. For OPG, we anticipate relatively flat revenue and significantly higher operating results. Operating income margin is expected to be in the mid-teens range for the third quarter of 2024. This expectation is based on performing work associated with the project scope that we recognized pre-contract costs on during the second quarter and a more favorable mix of projects focused on higher value-added services. For IMDS, we expect relatively flat revenue and operating profitability. For ADTech, we expect relatively flat revenue and significantly higher operating income, with operating margin in the low teens range. This expectation is based on similar levels of business activities and the absence of reserves recognized in the second quarter.

Unallocated expenses are expected to be in the mid-$40 million range in the third quarter of 2024. On a consolidated basis, for the full year 2024, as compared to 2023, we expect our consolidated adjusted EBITDA to be in the range of $340-$370 million. Our narrowed range is based on our expectation for continuing healthy activity levels in our offshore businesses, which we anticipate will be partially offset by lower results in ADTech. Net income is forecasted to be in the range of $130-$150 million. Net interest expense is projected to be in the range of $25-$28 million. Our other consolidated guidance for the year remains the same. Our estimated organic capital expenditure for 2024 remains between $110 and $130 million. This includes approximately $50-$60 million of maintenance capital expenditures and $60-$70 million of growth capital expenditures.

We forecast our 2024 cash income tax payments to be in the range of $80-$90 million, and unallocated expenses are expected to average $40 million per quarter for the remainder of 2024. Directionally, for our full year 2024 operations by segment as compared to 2023, for SSR, we continue to forecast improved operating results on a low- to mid-teens % increase in revenue. SSR EBITDA margins are expected to be in the mid-30% range in the second half of the year, leading to margins in the low- to mid-30% range for the full year. For ROVs, we expect ROV days utilized and revenue per day utilized 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 third quarters.

We estimate overall ROV fleet utilization to be in the high 60%-low 70% range, again with higher seasonal activity during the second and third quarters. We continue to forecast that our market share for the drill support market will remain in the 55%-60% range. For Manufactured Products, we project operating income to increase on a greater than 10% increase in revenue, with a slight improvement in margin. This expectation is based on our converting a portion of the $713 million in backlog and continuing strength in bidding activity in our energy businesses. We expect segment book-to-bill ratio will be in the range of 1.1-1.3 for the full year. For OPG, we continue to expect operating results to improve on a slight increase in revenue, with flat international activity and increased utilization in the Gulf of Mexico.

Overall, for 2024, OPG operating income margin is expected to be in the low to mid-teens range for the year. For IMDS, operating income results are expected to be similar on increased revenue. We continue to project year-over-year operating income margin to remain in the mid-single-digit range for the year. For ADTech, revenue is projected to increase with lower operating income results and operating income margin. In summary, based on our solid first half performance and outlook for the remainder of the year, we are maintaining $355 million as the midpoint of our 2024 adjusted EBITDA guidance range, while narrowing the range to $340 million-$370 million. It is worth noting that at the midpoint of our $110 million-$150 million free cash flow guidance range, we expect to generate free cash flow of $195 million over the remainder of the year.

Secondly, we remain encouraged and confident in the markets we serve. Our core energy markets continue to perform well, and though our ADTech group had a disappointing quarter due to the changes in the xEVAS program, the strength of their sales funnel, and in addition to their resilience and ability to find new opportunities, has me excited for the future of this business. We remain focused on our growth strategy in energy markets and increasing participation in longer-term non-energy growth markets. We appreciate everyone's continued interest in Oceaneering and now be happy to take any questions you may have.

Operator (participant)

At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2.

Once again, that is star and 1 if you would like to ask a question, and we'll take our first question from David Smith with Pickering Energy Partners. Your line is now open.

David Smith (Director)

Hey, good morning.

Roderick Larson (President and CEO)

Morning, David.

David Smith (Director)

Congratulations.

Roderick Larson (President and CEO)

Thanks.

David Smith (Director)

Congratulations on the stunning SSR margins.

Roderick Larson (President and CEO)

Thanks.

David Smith (Director)

So ROV pricing up almost $1,500 a day compared to Q2 of last year. Is it fair to think that daily costs probably didn't grow more than $500 in the same period?

Roderick Larson (President and CEO)

I think that's fair. I mean, we've had, I think, greater plateauing, I guess, of costs would be one way to put it. Also, just with, I think, more stability in the business, we've seen less churn. We talked about churn before. All of those things kind of add to a more steady-state operation of that equipment, and that helps us control costs as well.

David Smith (Director)

Okay. I appreciate that color. It is an impressive acceleration on the ROV pricing and profitability. Should we think about this as largely supported by existing backlog that's just rolling over to better contracts, or is it more that leading-edge pricing has inflected this year?

Roderick Larson (President and CEO)

No, it's on both counts, actually. I think we see that we've been able to raise on existing contracts. We've been able to move the price, but certainly, there is evidence of the same in the leading-edge pricing. So I think it's on both fronts.

David Smith (Director)

And my last very related follow-up is, if you could please remind us how to roughly think about the ROV contract rollover cadence. I mean, is it typical for 25%-35% of the fleet to reprice every quarter?

Roderick Larson (President and CEO)

I think that's a little high now. We're starting to see the contracts extend more than a year.

So we're probably moving away from 25% per quarter to something below that, getting in the range of maybe closer to 20% now.

David Smith (Director)

All right. Thank you so much.

Roderick Larson (President and CEO)

Thanks, David.

Operator (participant)

Thank you. We'll take our next question from Kurt Hallead with Benchmark. Your line is open.

Roderick Larson (President and CEO)

Hey, morning, Kurt.

Kurt Hallead (Head of Global Energy)

Hey, good morning. Good morning. Thanks for all the info and insights on the outlook. So let me just maybe follow up initially on the ROV side with respect to pricing. I don't know if you guys had the opportunity to see the day rates that Transocean put out on their fleet status report yesterday, with one of their rigs getting up to $580,000 a day. There's always been, or historically has been, a relationship, a positive relationship between deep-water rig pricing and ROV pricing. I think you referenced some pricing strength in your commentary, but is there any reason to think that that relationship between offshore rig rates and ROV rates is going to change this cycle versus prior cycles?

Roderick Larson (President and CEO)

No, I think that relation persists, certainly, and some of it just goes by. There's sort of a durable position on those rigs, for one thing. So as those rigs go and they get repriced, the ROVs have that opportunity as well. The other thing that we're seeing is utilization on contracted rigs. That looks strong, and people have talked about Q4. We actually think that the utilization on contracted rigs goes, and so when you're hearing that from the rig companies, that will also be a correlation to our business.

But finally, the thing I would offer on pricing and some of the things that we see on rigs as well is these performance-based contracts, which has been really good for us. Our performance is where we're differentiated, and so our ability to price on performance is actually a really nice market condition that we're seeing right now.

Kurt Hallead (Head of Global Energy)

Okay. That's great. That's great color. So second dynamic on the Manufactured Product side, again, I maybe just kind of tease out of you a little bit more what sort of evolution has been occurring on the automated forklift business, and you guys referenced the fact that you were going to be outsourcing some of the manufacturing. So maybe talka little bit about any incremental orders that have come over the transom, what your outlook is for that business with respect to incremental orders from here, and then the timing around the outsourcing of that manufacturing?

Roderick Larson (President and CEO)

Yeah. I think, first of all, the outsource on manufacturing is we got our first fully built forklift that came from the contract manufacturer in this quarter. So that was exciting, and things look good that we can be fully transferred by the end of the year. We could be building all the forklifts at that contract manufacturer. So that's on track. As far as orders go, I think the existing customer, we're still working to get those into their plants. We've got some other trials on forklifts ongoing. I would say at least a few of those are ones that could be volume buyers.

So we're just working through that, I would say, that initial relationship with those people, proving out the technology, making sure it fits for them, and then getting them comfortable with placing larger orders.

Kurt Hallead (Head of Global Energy)

Okay. Appreciate that. And the last one for me is just on that ADTech. You had that contract dispute. So we can probably back into the numbers, but if you make it easy on us, what was the dollar amount associated with that contract dispute?

Roderick Larson (President and CEO)

I probably can't give you that much detail on that, Kurt, and for a couple of reasons. Number one is, and I think everybody's seen we're a partner to Collins on that, and Collins was pretty open in the press, but you can maybe see some of the things that are going on around that. It's not over, right?

And so we're still talking about what does NASA want to do and where that might land. So it is really a dispute right now. So we have to stay kind of—it's hard to give exact numbers on that.

Kurt Hallead (Head of Global Energy)

Okay. And I kind of lied. I got one more. So you guys indicated you'd be open to now executing on a share repurchase program. What's your thoughts on that as we move forward from here?

Alan R. Curtis (SVP and CFO)

Yeah, Kurt, I'll take that one. I think it's one that we were very, I think, prescriptive in how we phrased it in our prior calls of looking at our free cash flow, and we were going to probably came in a little bit lighter here in Q2 on free cash flow, and we saw that starting to happen.

We just said we're going to really kind of focus on the back half of the year, looking at opportunities for share repurchases as we see more of the cash coming in from our customers.

All right. That's great. Thank you.

Thanks, Kurt.

Operator (participant)

Thank you. And once again, that is star 1. If you would like to ask a question, we'll take our next question from Josh Jayne with Daniel Energy Partners. Your line is now open.

Joshua Jayne (Managing Director)

Thanks. Good morning. I wanted to start on the Manufactured Products side. You had some sizable awards announced over the course of the quarter in Brazil and Mexico. Maybe you could just comment on the outlook for those markets for the Manufactured Products business and for umbilicals, and then maybe globally where we can expect to see further growth in orders going forward.

Roderick Larson (President and CEO)

I think you're seeing that global activity is still big in the Atlantic margin, I'll put it that way, and South America. So Suriname, Guyana, obviously still a hotspot. We see a lot of activity in West Africa. And while Africa is a total you just got to kind of keep an eye on. Some of those things are steady. They're ongoing projects. They go. Other things run a little bit up and down just due to some of the regulatory issues and getting those projects off the ground. But it's certainly a big market. And then I would just say Gulf of Mexico is warm. We see the activity on the Mexico side, but certainly in the U.S. side of Gulf of Mexico, the independents are active, and we see more and more projects being let there. And so I would watch those three in particular.

Joshua Jayne (Managing Director)

Okay. And then for my follow-up, you guys had a release out at the end of May with Total, where you noted that your Freedom AUV completed a pipeline inspection, and you highlighted the reduction in time and emissions of 50% versus existing methods. Maybe you could just talk about the addressable market for that asset, ultimate plans to build. And I'd assume there's some material cost savings to the customer, given that the time to complete is cut in half. And maybe you could just address that, and those opportunities would be great.

Roderick Larson (President and CEO)

Yeah, absolutely. And its best use is as a scanning tool. And so they go out, and they're able to scan more pipeline in a shorter amount of time with less carbon, as you say, and less vessel time. So that's one of the biggest advantages.

And as we prove out the technology, we do see more commercial interest. Certainly have some for the back half of the year, a couple of new things that have come at least into the pipeline. So we feel really good, no pun intended. But we feel really good about the market for scanning pipelines. And that's the biggest application we have with this current revision of Freedom is being able to go out there and scan them. And so that opportunity is real. I think it does. We'll be talking about using some of that growth CapEx for additional builds. The other side of that is we talked about this trial that we were running for the Defense Innovation Unit. Trials went really good in the last phase. So we feel good that there's some application for them as well.

I can't really speak to how they'll want to put that out in the field, but I think that likely would be something that we'd have to work into a build program as well.

Joshua Jayne (Managing Director)

Okay. Thanks. I'll turn it back.

Roderick Larson (President and CEO)

Thanks, Josh.

Operator (participant)

Thank you. And we do have a follow-up from David Smith with Pickering Energy Partners. Your line is now open.

David Smith (Director)

Hey, thanks for letting me back in. If I'm doing the math right, the midpoint of full year guidance, I think, implies a Q4 EBITDA midpoint that's up high single digits from the Q3 midpoint. And if that's right, what are the main drivers that would offset normal seasonal Q4 declines? I mean, flow-through of better ROV pricing, a real bump in Manufactured Products, something else?

Roderick Larson (President and CEO)

That was a little bit of the elephant in the room. So thanks for asking, David. Really, it's a couple of things.

I would say the two biggest movers are going to be, number one, OPG. It's OPG having some opportunities, both in the Gulf of Mexico and International, that we expect will go into Q4 and be a stronger Q4 than normally we would see in seasonality. The other thing is what I mentioned earlier when I talked about greater utilization of contracted rigs. That'll be an upside for SSR. So we think that where normally we're a little bit susceptible to the vessel-based, if we see a shift to more drill support work in the fourth quarter, that gives SSR a stronger fourth quarter.

Alan R. Curtis (SVP and CFO)

Those are the two biggest movers for an uptick in fourth quarter.

David Smith (Director)

Really appreciate that. And if I could ask an unrelated follow-up, just back to the sizable awards and Manufactured Products, can you give any color on how embedded margins for new large awards might compare to successful bids from, say, a year ago?

Roderick Larson (President and CEO)

Well, I can just say that as we're seeing these plants load up, right? I mean, just overall, more of the capacity is being defined around the world. Plus, in the supply chain, there's some constraints. So we're starting to see where you have access to materials and you have plant availability. We are continuing to see an uptick in pricing and margins. So I think the added backlog generally just continues to get better. Yeah.

Alan R. Curtis (SVP and CFO)

I think add a little more color to that, David, is while we're adding it into the backlog, a lot of this is going to be long-duration, long-cycle type projects that Rod alluded to in his call notes. It gives us visibility into 2026 and 2027 as well. So we're waiting on materials. When we receive the award, we'll go to our supply base. We'll go order materials, a lot of which are effectively 50-54 weeks out right now. So we really don't start to see those revenue streams and that improved pricing coming into our financials until a year down the road. And the final thing I'd add, probably goes without saying, but I'll say it anyways, is that absorption, right? The closer we have these plants to fully loaded, the better absorption we get, and that also hits the bottom line.

David Smith (Director)

Perfect. Really appreciate the call.

Operator (participant)

Thank you. Thank you. We have no further questions on the line at this time. I'll turn the program back over to our presenters for any additional or closing remarks.

Roderick Larson (President and CEO)

Yeah. Thank you, Brittany. Since there are no more questions, I'll just wrap up by thanking everybody for joining the call. This concludes our second quarter 2024 conference call. Have a great day.

Operator (participant)

Once again, this does conclude today's conference. Thank you for your participation. You may disconnect.