Oceaneering International Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 8 speakers on the call.

Operator

My name is Julie, and I will be your conference operator. Welcome everyone to Oceaneering's 3rd Quarter 2023 Earnings Conference Call. Question and answer period after the speakers' remarks. With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations.

Speaker 1

Thank you. Good morning and welcome to Oceaneering's 3rd Quarter 2023 Results Conference Call. Today's call is being webcast and a replay will be available on Oceaneering's website. 20. Joining us on the call today 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 Hilary Frisbie, who is working with me in Investor Relations.

Speaker 1

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 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 Q3 press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Speaker 2

Hey, good morning and thanks for joining the call today. As is our custom at this time of year, we're happy to be providing you with our initial thoughts on Oceaneering's 2024 outlook. 20. As announced yesterday, we are initiating 2024 guidance for earnings before interest, tax, depreciation and amortization or EBITDA in the range of $330,000,000 to $380,000,000 At the midpoint, this would represent a 25% increase over $285,000,000 2020, the midpoint of our revised adjusted EBITDA guidance for 2023. We are confident in our ability to deliver this solid improvement in 2024 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Speaker 3

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Speaker 2

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Speaker 3

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Speaker 2

20 20 20 20 2020. These fundamentals also underpin our expectation that our 2024 free cash flow will exceed that generated in 2023. 2019. Now I'll focus my comments on our performance for the Q3 of 2023, our current market outlook, Oceaneering's consolidated and business segment outlook for the Q4 full year of 2023 and our initial consolidated 2024 outlook, including the previously mentioned EBITDA guidance range and free cash flow expectations. After these comments, I'll then make some closing remarks before opening the call to your questions.

Speaker 2

Now to our Q3 summary results. Our improved 3rd quarter results were primarily due to strong global offshore activity. We produced $53,700,000 of free cash flow $84,100,000 of adjusted consolidated EBITDA, which was at the upper end of our guided range and exceeded consensus estimates for the 3rd quarter. Offshore activity drove quarter over quarter operating improvements in our Subsea Robotics or SSR and Offshore Projects Group or OPG segments. 2020.

Speaker 2

In addition and as expected, we also saw improvement in our Ad Tech segment. Now let's look at our business operations by segment for the Q3 of 2023. SSR revenue and operating income both increased as expected when compared to the 2nd quarter, SSR EBITDA margin of 31% improved over the Q2 of 2023, reflecting the benefit of new contract pricing. The SSR revenue split was 76% from our ROV business and 24% from our combined tooling and survey businesses compared to the 78% 22% split respectively in the immediate prior quarter. Sequential ROV days on hire were 1% lower 2019 at 15,932 days as compared to 16,032 days during the 2nd quarter.

Speaker 2

With a decrease in drill support days and a slight increase in vessel based services, our fleet use was 61% in drill support and 39% in vessel based services, the same as in the Q2 of 2023. We maintained our fleet count 20 50 ROV systems and our 3rd quarter fleet utilization was 69%, a slight decline from the 70% achieved in the 2nd quarter. Average ROV revenue per day on hire of $9,372 was 3% higher than average ROV revenue per day on hire 2019. We expect to continue to be in the second quarter. At the end of September 2023, we had 61 percent drill support market share with ROV contracts on 89 of the 146 floating rigs under contract as compared to the 62% recorded Turning to manufactured products.

Speaker 2

Sequentially, our Q3 2023 operating results and revenue declined. 2018. Operating income and related margin percentage of $8,200,000 7%, respectively, declined from the Q2 of 2023, due primarily to changes in product mix. Order intake during this quarter was strong throughout our energy businesses with backlog increasing to 5 $56,000,000 on September 30, 2023 from $418,000,000 on June 30, 2023. Our book to bill ratio was 1.25 for the 9 months ended September 30, 2023 and was 1.41 for the trailing 12 months.

Speaker 2

OPG 3rd quarter 2023 operating income increased as compared to the Q2 of 2023 on a 15% increase in revenue. 2018. Operating income margin improved to 18% as compared to the 13% margin achieved in the 2nd quarter, Reflecting increased demand for vessel based services globally, changes in service mix and the successful resolution of a commercial dispute. Integrity Management and Digital Solutions or IMBS 3rd quarter 2023 operating income declined slightly from the preceding quarter on a 5% increase in revenue. 2018.

Speaker 2

Operating income margin of 5% declined from the 6% recorded in the Q2 of 2023 due primarily to slight changes in geographic and service mix. Adtech's 3rd quarter 2023 operating income increased significantly from the 2nd quarter on a 6% increase in revenue. 2018. Operating income margin of 14% improved from the Q2 of 2023 and benefited from margin recovery on prior quarter contract costs. On a consolidated basis, we believe that our Q4 2023 EBITDA will decline on relatively flat revenue as compared to our Q3 results.

Speaker 2

While we anticipate a seasonal slowdown in the 4th quarter, we still expect relatively good activity in our offshore markets. Broadly for the Q4 of 2023 as compared to the Q3, For our Q4 2023 operations by segment as compared to the Q3 of 2023, for SSR, we are projecting 2019. ROV days on hire are forecast to decline slightly as compared with the 3rd quarter with slightly higher drill support days being more than offset by a seasonal decline in vessel base days. We expect good survey activity to continue during the Q4. 2019.

Speaker 2

Our forecast assumes overall ROE fleet utilization to be in the upper 60% range. SSR 4th quarter 2023 adjusted EBITDA margin is significantly lower operating profitability as compared to the 3rd quarter with operating income margin in the low single digit range. 20 20 20 20 20

Speaker 3

20 20 20 20

Speaker 2

20 20 20 20 20 20 20 20 For OPG, we expect slightly lower revenue and significantly lower operating profitability in the Q4 of 2023. Although revenue is projected to remain close to that of the 3rd quarter, we anticipate a shift in mix with lower vessel activity in West Africa. Which benefited the Q3. As a result, sequentially, Q4 2023 operating income margin is expected to be lower, averaging in the low teens range. For IMBS, we expect slightly lower revenue and operating results as compared with the Q3 of 2023.

Speaker 2

Q3 due to slight changes in project mix.

Speaker 3

For the

Speaker 2

Q4, we expect operating income margins to be in the lowtomidteens percentage range. 2018. For the full year of 2023, We expect to generate adjusted EBITDA within the narrowed range of $275,000,000 to $295,000,000 and our guidance for cash income tax payments is in the range of $70,000,000 to $75,000,000 Our free cash flow guidance is unchanged. 20. We expect to generate positive free cash flow in the range between $90,000,000 $130,000,000 for the full year of 2023.

Speaker 2

2019. Now turning to our free cash flow and debt position. Our cash flow from operations for the Q3 of 2023 was $79,600,000 2019 and was the primary driver in the increase in our cash and cash equivalents to $556,000,000 as of September 30, 2023. On September 20, 2023, we initiated a series of transactions designed to address our $400,000,000 senior notes scheduled to mature in November 2024. Once the final transaction is completed in early November 2023, Now looking forward to 2024.

Speaker 2

Overall, we see solid fundamentals supporting each of our current businesses for the medium term, 2019. And national security priorities continue to support our expectation for growth in our government focused businesses. In addition, with increasing demand for robotic solutions, We see expanding opportunities to leverage and grow our remote and automated robotics capabilities across our energy and non energy businesses. Accordingly, looking into 2024 year over year, we are anticipating increased activity and improved operating performance across all of our operating segments led by gains from SSR and OPG. At this time, we forecast EBITDA to be in the range of $330,000,000 to 3 $80,000,000 in 2024, driving meaningful levels of cash flow from operations.

Speaker 2

I would like to point out here Our guidance range for 2024 anticipates a continued strong U. S. Dollar, which would negatively impact U. S. Dollar earnings in our international businesses, 2018, particularly in countries like Norway, the UK and Brazil.

Speaker 2

We currently estimate the year over year EBITDA impact to be in the range of $5,000,000 to $10,000,000 2020. Capital discipline remains a priority and we expect to generate positive free cash flow in excess of that generated in 2023. We will provide more specific guidance on our expectations for 2024 during the year end reporting process. In summary, based on our year to date financial performance and expectations for the Q4 of 2023, We are narrowing our adjusted EBITDA guidance to a range of $275,000,000 to $295,000,000 for the full year. We continue to see growth in all our business segments in 2024 based on the increasing global demands for energy and continued focus on national security issues.

Speaker 2

Expanding opportunities to apply our robotics expertise in the new energy and non energy markets, including for example, our Freedom autonomous underwater vehicle and Max Mover Autonomous Counterbalance Forklift provide us with further confidence in our ability to achieve these growth forecasts. Our focus continues to be on maintaining a strong safety culture and safety performance, maintaining our financial and capital discipline, Generating significant positive free cash flow, growing through organic and inorganic means, 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

Operator

twenty nineteen. Your first question comes from Kurt Hallead from Benchmark. Please go ahead.

Speaker 4

Hey, good morning guys.

Speaker 2

Good morning, Kurt.

Speaker 4

Never a dull moment. So I'll start with an observation. And Given your guidance levels for 2024, it looks like they're within 2% of where the Street is. I'd say a 9% sell off It's definitely overdone, but what do I know? So on to the question.

Speaker 4

So you kind of provided an outlook, initial outlook on EBITDA 2024. And you referenced the SSR and manufactured products part of business will be the So I was wondering if you could maybe give us a little more context around, let's say, SSR and what you think in terms of utilization and what kind of margin progression do you think you get out of that going into next year?

Speaker 2

Sure. I'll hit that a little bit, Kurt. I think what we're seeing is the on utilization, We're tracking kind of what we we have line of sight, to the rig increases mostly. I mean, we think market share holds, to maybe improve slightly from where we are today. So depending on how many working rig adds we have next year, we think that that goes into the low 70s during those peak month or peak quarters.

Speaker 2

But again, it's not huge unless we see more working floater days. So that's it for utilization. But again, encouraging news. We just we look at what we hear in the market, but we also look at what we have hearing from the rig operators themselves telling us what the 2020. So that's kind of where we land on utilization.

Speaker 2

On pricing, one of the things that we'll just say is we continue to drive pricing. I think there's been a lot of optimism out there. And I think what's driving consensus is the pricing improvements probably are happening In smaller bits and chunks than maybe what was out there in the market, but it continues to be directionally correct. So we just have to see how long it takes Recognize all of those, but we definitely see continued walk up in margins into next year.

Speaker 4

Got you. And then maybe Mike yes.

Speaker 5

Yes. I think, Kirk, your other question in there was about OPG and kind of the outlook, Why we have a level of confidence there. And I think we've been talking through several of the items that we have in our bid right now. We're seeing a lot of market interest in kind of some of these field support services contract, Which tend to be longer duration, tend to be 2 to 4 years in contract length. So We're encouraged to see the market out there that is kind of returning to what we saw back in the 2014 timeframe where people would sign up for longer duration contracts for vessel and support services, project management and other service So that's the other part of why we see OPG really starting to

Speaker 2

Hey, Kurt, I want to make one comment before you ask your next question. I mean, you said it kind of when you opened up We're not that far off a consensus and that's why we did want to point out the FX effect. 2020. And really when we think about, I think our numbers are the same. I think the consensus was pretty much right Without maybe us having the full shared benefit of what the FX effect.

Speaker 2

A lot of our growth next year is coming from international markets and That kind of with the strong dollar, we think that there's going to be some pressure on currency in Norway, currency in the UK and Brazil. So if you true that up, I bet we're Darn close to the same number.

Speaker 4

Okay, great. Appreciate that color. Second question then is on, I believe your industrial robotics business is embedded in Manufacturer Products, right. So I just wondered if you could give us an update on the market penetration you have, whether that's on the Autonomous forklifts or on your autonomous people movers, just how you see that business evolving and what kind of market penetration you've been able to get?

Speaker 2

Market penetration is going up. We're getting new customers. So we've added a couple of customers with Pretty strong interest, I think everything just short of the PO, but that could change today. So that the number of customers is improving, but also The order from our one biggest customer, we got 4 more orders that are significant. So that looks really good And really strong.

Speaker 2

And again, we're getting a lot of recognition for that. The other thing I would just call out, manufactured products, We had our annual planning meeting last week and we pushed really hard on margins in manufactured products. So We've built in some costs for we don't know what those changes will be, but we've built in some costs for taking some action that we think will drive margin improvement in the manufactured

Speaker 5

And I think to your mobile robotics, I mean, you may have seen or not seen the recent announcement that came from ZF as well about solidifying our arrangement on the people movers we've been describing to the market. So I think that's something that doesn't really impact 2024 as much, but longer term, we're encouraged with what

Speaker 2

It looks like since 3rd.

Operator

And your next question comes from James Shum from TD Cowen. Please go ahead.

Speaker 6

Just maybe update on the SSR or the ROV 2018. I mean in the past we've talked about exiting this year at 10,000 And then I think in 2024, the exit rate of 11,000, is that still in play?

Speaker 2

I think it's challenged. I don't know that the numbers have gone away, but I think it's just taking longer to build. So whether that takes another quarter or 2 to get to those numbers, I think we're still pushing hard. And some of it depends on how some of the other markets develop. We've got the strong markets and I'll just say the strong markets like West Africa and GOM, We're on track.

Speaker 2

I think where it's harder is some of the and Norway is a fairly stable market, but those are lower ROV rates. They're on the underside of the average. In Brazil, which is growing, is probably one of our opportunities, especially with non Petrobras customers, to try to get to something that looks more like the global average.

Speaker 6

Okay, great. And then 2020. In the past, you guys have had an issue in ad tech with government funding shifting around when we have these dislocations with Government Spending and now we're talking about is there going to be a continuing resolution or just so I just wanted to see If you're having any issues currently and if you expect any negative impact to AdTech as we

Speaker 2

We scrubbed that pretty well, James. And what I would say is, It's not like we had in the past where I mean, one of the biggest problems is continuing resolution means that new projects aren't being accepted. Most of what we're working on right now is existing products. So that bodes pretty well. There are a couple of things that we think maybe would be sensitive to delay, but they're smaller projects.

Speaker 2

So it's we've got most of that built in the mix.

Speaker 6

Okay, great. That's it for me. Thanks guys.

Operator

Your next question comes from David Smith from Pickering Energy Partners. Please go ahead.

Speaker 2

Good morning, David.

Speaker 7

Hey, good morning. Good morning. Very impressive order intake for manufactured products. I was wondering if you could Give any color there, if there were some big lumpy orders. And maybe just if you could a quick update on what percentage

Speaker 5

Yes, I think part of the order intake, it's certainly been widespread. There's not really a Single order, which we've alluded to in the past of some of the lumpiness that can come in. These have been a pretty good Well, we haven't disclosed the orders in the non energy side, David, I mean Rod just kind of alluded to, We did see some nice orders in the Q3 to add to the backlog in the mobile robotics platform. So we've more than doubled the base order at this point in time That will certainly build a nice platform for manufacturing next year on these autonomous mobile forklifts. So order adoption is certainly picking up across the board within

Speaker 7

That's good color and appreciated. I guess kind of related

Speaker 5

David, one of the things I'd like to just add is, as I look at that backlog and what's important to me is, we do still anticipate some additional awards In the manufactured products, but when you get it across all the plant sites and I've lived in this business, It's more meaningful than just getting one big award because we talk about absorption all the time these plants and by being able to feed every plant That work, it is something that we're always looking at. So it's well spread through the organization.

Speaker 7

I appreciate that color. I did want to make sure just to refresh my memory that the DPR That would be coming through OPG, correct?

Speaker 5

Correct.

Speaker 7

Perfect. And talk about Sorry.

Speaker 4

It's kind of the extension to the

Speaker 5

existing contract with an option for Petrobras to add us an additional system, which at this point we don't believe they're going to take, but It's an option they do hold through December of this year. But it's been good work for us. In fact, Brazil has been a strong growth area for us throughout many of our businesses this year.

Speaker 7

Yes, absolutely. And last one if I may, just for calibration. Could you Please elaborate on the impact that the commercial dispute resolution had for the OPG margins in 3rd quarter?

Speaker 5

I don't think we put a number out there on that, but it's really an element of what we had in Q1, Q2 where we had taken some level of reserves and we're able to successfully negotiate it With the customer in the Q3. So within the year, the pot is right. So the margins for the year are what I would say reflective of our true operations. We just had a little bit of that, I'll say lumpiness of working through this with the customer Within the quarter.

Speaker 7

Makes perfect sense. Appreciate it and we'll turn it back. Thank you.

Speaker 2

Thanks, Dave.

Operator

And there are no further questions at this time. I will turn the call back over to Rod Larson for final comments.

Speaker 2

All right. Well, since there are no more questions, I just wrap up by thanking everybody for joining the call. And this concludes our Q3 2023 conference call. Thank you.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.

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