Fifth Third Bancorp Q1 2023 Earnings Call Transcript

There are 3 speakers on the call.

Operator

Morning, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. Welcome to Oceaneering's First Quarter 2023 Earnings 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.

Operator

With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

Speaker 1

Thanks, Michelle. Good morning, everyone, and welcome to Oceaneering's Q1 2023 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website. 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 1995.

Speaker 1

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.

Speaker 2

Hey, good morning, and thanks for joining the call today. Our Q1 financial results surpassed our guidance range and consensus estimates, supporting our belief that the offshore energy recovery is continuing. We believe market conditions continue to be supportive of healthy activity levels and continuing pricing improvements in the majority of our energy businesses for the remainder of the year. As a result, for the full year of 2023, we are maintaining our original adjusted EBITDA guidance range of $260,000,000 to $310,000,000 and our expectation to generate free cash flow in the range of $75,000,000 to $125,000,000 Today, I'll focus my comments on our performance for the Q1 of 20 23, our consolidated and business segment outlook for the Q2 and full year of 2023, our balance sheet and liquidity situation and the positive macro data points that continue to drive our markets. For the Q1, we reported net income of $4,100,000 or $0.04 per share on revenue of $537,000,000 These results included the impact of $300,000 of pretax adjustments associated with foreign exchange gains and $1,500,000 of discrete tax adjustments, primarily due to changes in valuation allowances and share based compensation.

Speaker 2

Adjusted net income was $5,400,000 or $0.05 per share. Our consolidated Q1 2023 results came in higher than guided on better than expected revenue. We believe these results combined with current bid activity levels support to continuing recovery in our offshore markets. Consolidated Q1 2023 revenue was essentially flat as compared to the Q4 of 2022 with revenue increases in our Manufactured Products and Integrity Management and Digital Solutions or IMBS segments Q1, due in part to the ongoing improvement in our offshore markets being offset by a seasonal revenue decline in our Offshore Projects Group segment or OPG. As compared to the Q1 of 2022, consolidated Q1 2023 revenue was up more than 20%, led by significant revenue increases in our Manufactured Products and Subsea Robotics or SSR segments.

Speaker 2

This is particularly encouraging since our Q1 has generally over the last several years represented the lowest revenue quarter of the year. For the Q1 of 2023, our consolidated adjusted EBITDA of $55,000,000 exceeded our guidance range and consensus estimates. Now let's look at our business operations by segment for the Q1 of 2023. SSR operating income was lower Despite a marginal increase in revenue as compared to the Q4 of 2022, sequentially as expected results were lower due to the absence of accrual releases that benefited the prior quarter and higher remotely operated vehicle or ROV and survey maintenance and mobilization costs in preparation for increased activity over the next several quarters. Consequently, EBITDA margin declined to 29% for the Q1 of 2023.

Speaker 2

Revenue split between our ROV business and our combined tooling and survey businesses as a percentage of our total SSR revenue was 77% and 23%, The same split as in the prior quarter. Our fleet utilization and days on hire were essentially flat with the prior quarter. Utilization of 63% was up slightly over the 62% in the prior quarter and our days on hire were down less than 1% on fewer available working days in the quarter. Our ROV fleet used during the Q1 2023 was 65% in drill support and 35% in vessel based activity, The same split as in the prior quarter. Average ROV revenue per day on hire of $9,176 was 2% higher than the previous quarter.

Speaker 2

We maintained our fleet count at 250 ROV systems in the Q1. At the end of March, we had ROV contracts on 90 of the 1 148 floating rigs under contract or 61%. This was an incremental improvement over the prior quarter when we had ROV contracts on 83 of the 141 floating Under Contract or 59%. Turning to manufactured products, our Q1 2023 operating income improved significantly as compared with the Q4 of 2022 on a 13% increase in segment revenue. Operating income margin improved to 10% in the Q1 of 2023 from a 6% margin in the Q4 of 2022 Due to better cost absorption and favorable project mix within our Energy businesses.

Speaker 2

As expected, our Energy businesses experienced slower sequential order intake in the Q1 of 2023, although bidding activity remains strong. Our manufactured products backlog On March 31, 2023, it was $446,000,000 compared to our December 31, 2022 backlog of $467,000,000 Our book to bill ratio was 1.27 for the trailing 12 months as compared with a book to bill ratio of 1.39 for the year ended December 31, 2022. OPG Q1 2023 operating income declined as expected on a 15% seasonal decline in revenue. Operating income margin declined 5% in the Q1 from 9% in the Q4 2022, primarily due to lower seasonal pricing and vessel utilization in the Gulf of Mexico and higher diving related costs in West Africa. For IMDS, Q1 2023 operating income was lower than the Q4 2022 on an 8% increase in revenue.

Speaker 2

The revenue increase resulted from expanded scopes being added to several projects. Operating income declined to 5% in the Q1 of 2023 9% in the Q4 of 2022, which included the benefit associated with efficient personnel management for the full year of 2022. Aerospace and Defense Technologies or ADTEC Q1 2023 operating income declined sequentially on relatively flat revenue. Operating income margin of 9% declined from the 11% achieved for the Q4 of 2022 due to higher planned costs on several projects in our expense Subsea Technologies Business. Unallocated expenses of $35,300,000 were at the low end of our guidance range.

Speaker 2

For the Q1 of 2023, we utilized $42,900,000 in cash in operating activities and an additional $18,300,000 for maintenance and growth capital expenditures, resulting in negative free cash flow of $61,200,000 Consistent with the past few years, our cash balance declined during the first quarter. Cash decreased by $64,000,000 in the Q1 of 2023 as compared to the $100,000,000 decrease during the Q1 of 2022. At the end of the quarter, we had $505,000,000 of cash and cash equivalents, no borrowings under our secured revolving credit facility and no loan maturities until November 2024. Now I'll address our outlook for the Q2 of 2023. On a consolidated basis, we expect our Q2 2023 results to improve significantly with adjusted EBITDA in the range of $75,000,000 to $85,000,000 on the lowtomidteens percentage increase in revenue, our Q2 2023 operations by segment as compared to the Q1 of 2023.

Speaker 2

For SSR, we are projecting higher activity levels across our ROV survey and tooling businesses with significantly higher segment operating profitability. ROV days on hire are expected to increase in both drill support and vessel based activities, achieving utilization in the low 70% range. SSR adjusted EBITDA margin is forecast to be in the low 30% range. For manufactured products, we anticipate higher revenue lower operating profitability in the Q2 of 2023. We expect operating income margins to fall to the mid to high single digit range due to changes in project mix and higher levels of certain umbilical materials that are not expected to contribute to Q2 manufacturing activities.

Speaker 2

Our Energy Products businesses continue to see robust bidding activity. For OPG, we anticipate significantly higher revenue and operating results. We expect a seasonal uptick in Intervention, Maintenance and Repair or IMR activity, Primarily in the Gulf of Mexico. Operating income margins are expected to increase to the mid teens range for the Q2 of 2023. For IMDS, we expect relatively flat revenue and operating profitability with operating margins remaining in the mid single digit range.

Speaker 2

For AdTech, we expect higher revenue and a significant improvement in operating results. We expect operating income margins to improve to the low to mid teens range Due to the absence of planned costs that pushed down the margin in the Q1, unallocated expenses are expected to be in the mid to high $30,000,000 range for the Q2 of 2023. Directionally, for our full year of 2023 operations by segment as compared to 2022, we expect: For SSR, we forecast improved operating results on a mid teens percentage increase in revenue. ROV days on hire are projected to increase year over year activity as well. SSR forecasted adjusted EBITDA margins are expected to average in the low 30% range for the full year.

Speaker 2

For ROVs, we expect our service mix of 61% drill support and 39% vessel based services in 2022 to remain relatively the same in 2023 with higher vessel base percentages during the seasonally higher second and third quarters. We estimate overall fleet RV fleet utilization to be in the mid-sixty percent range, again, with higher seasonal activity during the 2nd 3rd quarters. Pricing for our ROV services continues to increase, allowing us to offset increasing costs for assets and labor. We continue to forecast that our share of the drill support market will remain in the 55% to 60% range for the near term. As of March 31, 2023, there were approximately 5 Oceaneering ROVs onboard 5 floating drilling rigs with contract terms expiring during Q3.

Speaker 2

During the same period, we expect 33 of our ROVs on 27 floating rigs to begin new contracts. For manufactured products, we expect a significant increase in revenue and operating income with our healthy backlog levels driving increased activity throughout the year. We project a slight improvement in operating income margin over the full year of 2022, averaging in the mid single digit range for 2023. Bidding activity in our Energy businesses remains robust. Bidding activity in our Mobility Solutions businesses is improving, Especially with respect to our Max Mover counterbalanced forklift product, where we are seeing noticeable customer interest.

Speaker 2

We expect segment book to bill ratio to be in the range of 1.2 to 1.4 for the full year. For OPG, we expect relatively flat revenue and significantly improved operating income driven by increased vessel utilization to result operating income margins averaging in the low teens range for the year. We continue to actively monitor the vessel market and customer activities, and we will adjust our vessel charters as required To best serve anticipated demand. For IMBS, we project slightly higher operating income results. Our focus on expanding into new geographies and adding new customers is expected to result in a high single to low double digit growth in revenue as compared to 2022.

Speaker 2

We forecast year over year operating income margin revenue as compared to 2022 with operating income margin projected to remain in the low teens range. We continue to see good growth opportunities across All of our Ad Tech Businesses. On a consolidated basis, our estimated organic capital expenditure total for 2023 remains between $90,000,000 $110,000,000 This includes approximately $45,000,000 to $50,000,000 of maintenance capital expenditures $45,000,000 to $60,000,000 of growth capital expenditures. We forecast our 2023 cash income tax payments to be in the range of $60,000,000 to $65,000,000 Net interest expense is projected to be in the range of $15,000,000 to $20,000,000 As we continue to benefit from investing our cash at higher interest rates and unallocated expenses are expected to average in the mid to high $30,000,000 range per quarter Q3. Now turning to our balance sheet and liquidity.

Speaker 2

With $505,000,000 of cash at the end of March And the expectation of generating 2023 free cash flow in the range of $75,000,000 to $125,000,000 We continue to be well positioned to address our 2024 debt maturity. Given that the current level of interest earned on our invested cash Largely offsets the interest obligations under the 2024 senior notes, we continue to invest our cash. Our undrawn senior secured revolving credit facility gives us additional financial flexibility over the next 3 years. We'll remain supportive of higher activity levels over the next several years, as evidenced by the current projection by the Energy Information Administration Brent Crude oil price to average $85 per barrel in 2023 and more than $80 per barrel in 2024. Our internal estimates of continued gradual growth in ROV activity, independent research forecasts For nearly double the offshore FIDs in 2023 over 2022 and another increase in 2024 projected tree installations to increase approximately 10% year over year and new tree orders to be up over 60% as compared to 2022.

Speaker 2

And finally and importantly, evidence of the geopolitical front that energy security remains a priority. In summary, our Q1 performance and refreshed outlook for the year give us confidence to maintain our 2023 adjusted EBITDA guidance range of 2 $310,000,000 We remain well positioned to generate healthy levels of free cash flow from our traditional energy markets We remain focused on safety, 1st and foremost, generating substantial positive free cash flow in 2023, Improving our returns through increased asset utilization, creating value added solutions for our customers and improving pricing and 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 we'll now be happy to take any questions you may have.

Operator

Call. Followed by the number call. There are no questions from the phone lines, gentlemen. Please proceed with any closing remarks.

Speaker 2

No. Thank you very much. I'd like to wrap By thanking everyone for joining the call, this concludes our Q1 2023 conference call.

Operator

Ladies and gentlemen, this does indeed conclude your conference call for this morning. We would like to thank you all for your participation and ask you to please disconnect your

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Earnings Conference Call
Fifth Third Bancorp Q1 2023
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