Oceaneering International [OII] Conference call transcript for 2023 q1
2023-04-27 16:29:06
Fiscal: 2023 q1
Operator: Good 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. 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.
Mark Peterson: Thanks, Michelle. Good morning, everyone, and welcome to Oceaneering's first quarter 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. 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 first quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.
Roderick Larson: Good morning, and thanks for joining the call today. Our first quarter 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 million to $310 million, and our expectation to generate free cash flow in the range of $75 million to $125 million. Today, I'll focus my comments on our performance for the first quarter of 2023, our consolidated and business segment outlook for the second quarter and the full year of 2023, our balance sheet and liquidity situation and the positive macro data points that continue to drive our markets. For the first quarter, we reported net income of $4.1 million or $0.04 per share on revenue of $537 million. These results included the impact of $0.3 million of pretax adjustments associated with foreign exchange gains and $1.5 million of discrete tax adjustments, primarily due to changes in valuation allowances and share based compensation. Adjusted net income was $5.4 million or $0.05 per share. Our consolidated first quarter 2023 results came in higher than guided on better than expected revenue. We believe these results, combined with current bid activity levels support the continuing recovery in our offshore markets. Consolidated first quarter 2023 revenue was essentially flat as compared to the fourth quarter of 2022, with revenue increases in our manufactured products and Integrity Management and Digital Solutions, or IMDS segments, 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 first quarter of 2022, consolidated first quarter 2023 revenue was up more than 20%, led by significant revenue increases in our manufactured products and Subsea Robotics or SSR segments. This is particularly encouraging since our first quarter is generally, over the last several years, represented the lowest revenue quarter of the year. For the first quarter of 2023, our consolidated adjusted EBITDA of $55 million exceeded our guidance range and consensus estimates. Now let's look at our business operations by segment for the first quarter of 2023. SSR operating income was lower despite a marginal increase in revenue as compared to the fourth quarter 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 first quarter 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 77% and 23%, respectively, 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 use during the first quarter 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. We maintained our fleet count at 250 ROV systems in the first quarter. At the end of March, we had ROV contracts on 90 of the 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 rigs under contract or 59%. Turning to manufactured products, our first quarter 2023 operating income improved significantly, as compared with the fourth quarter of 2022, on a 13% increase in segment revenue. Operating income margin improved to 10% in the first quarter of 2023, from a 6% margin in the fourth quarter 2022, due to better cost absorption and favorable project mix within our energy businesses. As expected, our energy businesses experienced slower sequential order intake in the first quarter of 2023, although bidding activity remained strong. Our manufactured Products backlog on March 31, 2023 was $446 million, compared to our December 31, 2022 backlog of $467. Our book-to-bill ratio was 1.27 for the trailing 12 months, as compared to the book-to-bill ratio of 1.39 for the year ended December 31, 2022. OPG first quarter 2023 operating income declined as expected, on a 15% seasonal decline in revenue. Operating income margin declined to 5% in the first quarter, from 9% in the fourth quarter 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, first quarter 2023 operating income was lower than the fourth quarter 2022 on an 8% increase in revenue. The revenue increase resulted from expanded scopes being added to several projects. Operating income declined to 5% in the first quarter of 2023, from 9% in the fourth quarter of 2022, which included a benefit associated with efficient personnel management for the full year of 2022. Our Aerospace and Defense Technologies or ADTech, first quarter 2023 operating income declined sequentially on relatively flat revenue. Operating income margin of 9% declined from the 11% achieved for the fourth quarter of 2022 due to higher planned costs on several projects in our defense Subsea technologies business. Unallocated Expenses of $35.3 million were at the low end of our guidance range. For the first quarter of 2023, we utilized $42.9 million in cash and operating activities and an additional $18.3 million for maintenance and growth capital expenditures, resulting in negative free cash flow of $61.2 million. Consistent with the past few years, our cash balance declined during the first quarter. Cash decreased by $64 million in the first quarter of 2023 as compared to the $100 million decrease during the first quarter of 2022. At the end of the quarter, we had $505 million 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 second quarter of 2023. On a consolidated basis, we expect our second quarter 2023 results to improve significantly with adjusted EBITDA in the range of $75 million to $85 million on a low to mid-teens percentage increase in revenue. Our second quarter 2023 operations by segment as compared to the first quarter of 2023: 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 and lower operating profitability in the second quarter 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 [unbillable] (ph) materials that are not expected to contribute to second quarter manufacturing activities. 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 second quarter of 2023. For IMDS, we expect relatively flat revenue and operating profitability with operating margins remaining in the mid-single digit range. 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 plant costs that pushed down the margin in the first quarter. Unallocated expenses are expected to be in the mid to high $30 million range for the second quarter 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 by a double-digit percentage with tooling based services results generally following ROV days on hire. Survey results are expected to improve on higher levels of activity as well. SSR forecasted adjusted EBITDA margins are expected to average in the low 30% range for the full year. 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-based percentages during the seasonally higher second and third quarters. We estimate overall ROV fleet utilization to be in the mid-60% range, again, with higher seasonal activity during the second and third 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 are approximately five Oceaneering ROVs on board five floating drilling rigs with contract terms expiring during -- before the third quarter. 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 MaxMover counterbalance forklift product, where we are seeing noticeable customer interest. 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 in 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 IMDS, 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. We forecast year-over-year operating income margin to remain in the mid-single digit range for the year. For ADTech, we project higher operating income results on a low to mid-teens increase in 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 ADTech businesses. On a consolidated basis, our estimated organic capital expenditure total for 2023 remains between $90 million and $110 million. This includes approximately $45 million to $50 million of maintenance capital expenditures and $45 million to $60 million of growth capital expenditures. We forecast our 2023 cash income tax payments to be in the range of $60 million to $65 million. Net interest expense is projected to be in the range of $15 million to $20 million 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 million range per quarter for the remainder of 2023. Now turning to our balance sheet and liquidity. With $505 million of cash at the end of March and the expectation of generating 2023 free cash flow in the range of $75 million to $125 million, 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 three years. On a macro basis, we see continued signs -- positive signs in our offshore energy markets and feel that commodity prices will remain supportive of higher activity levels over the next several years, as evidenced by the current projection by the Energy Information Administration for 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 [free] (ph) installations to increase approximately 10% year-over-year and [nutri] (ph) orders to be up over 60% as compared to 2022. And finally, and importantly, evidence of the geopolitical front that energy security remains a priority. In summary, our first quarter performance and refreshed outlook for the year give us confidence to maintain our 2023 adjusted EBITDA guidance range of $260 million to $310 million. We remain well positioned to generate healthy levels of free cash flow from our traditional energy markets over the next several years, while maintaining focus on increasing our participation in longer-term non-energy growth markets. We remain focused on safety, first 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: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] There are no questions from the phone lines, gentlemen, please proceed with any closing remarks.
Roderick Larson: No. Thank you very much. I'd like to wrap up by thanking everyone for joining the call. This concludes our first quarter 2023 conference call.
Operator: Ladies and gentlemen, this does indeed concludes your conference call for this morning. We would like to thank you all for your participation and ask you to please disconnect your lines.
End of Q&A:
