Oceaneering International Inc (OII) 2002 Q1 法說會逐字稿

Thank you.

Good morning everybody, this is Jack Jurkoshek speaking. I like to thank you for joining us on a 2002 first quarter earnings conference call. I like to particularly like to welcome those of who, who may be in the webcast for this event, which is being made available through the company's boardroom service by CCBN.

Join me today is John Huff, our Chairman and Chief Executive Officer who will be leading the call, Marvin Migura, our Chief Financial Officer and Bob our Treasurer.

This is a remainder before we get started that remarks we make during the course of call regarding the 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. I am now going to turn the call over the John.

Good Morning,

Thanks for joining the call.

Due to the fact that I just recently got back from Europe, and I have a different terms on, I got to this morning, so I have got more remarks to make than I normally do. As our standard practice, the press release contained our complete message to the shareholders in the financial community. We are trying to keep our story straightforward and comply with the real intend in concept before disclosure. I see my role today is to add color on those comments, go with the numbers with you, discuss what I think were the highlights and try to answer your question at the end of the call.

First I like to add it once again is truly a pleasure to talk to you after the current quarter we just finished, as we indicated, we are quite pleased with the results.

The $10.2 million of net income for the first quarter of 2002 was the highest amount of income in Oceaneering history for the first quarter and nearly doubled the previous record set for the first quarter in 2001. This marks the fifth consecutive quarter we have established a new earnings record for each period. While we still have seasonality, it is diminishing over time. I don't believe many other offshore service firms have our current track record in sequential earnings. We are proud prior to our accomplishment in light of the industry, the conditions that have persisted during this times. We believe our earnings record is tribute to our niche technology strategy and resolved a $450 million of capital assets added over the last five years. This growth was accomplished organically by expanding our presence and technical niche market, which were focused on providing deep-water products and services. We believe these investments will service well in the future by providing us increased earnings leverage with improved market conditions and good visibility of how we are doing in each niche. At this time, we see no reasons for changing the 2002 forecast; we shared with you last quarter.

To write the guidance in the press release we continue to believe we are positioned to set consecutive net incomes in 2002 and 2003. We believe, we will earn at least $1.50 per share in 2002. Finally, the world could stop or the deep water activities become further curtailed having my current sense of confidence is high, and we will see reasonable market and our execution will continue in acceptable level. As for next quarter, we are going to give the same guidance, we gave for the first quarter. We believe we should earn net income in the range of $0.35 to $0.40. As indicated in the press release this will also be a new record for a second quarter by again passing the milestone set in 2001.

Before, I go into my usual view of operation for the quarter, I like to share a somewhat tongue and cheek philosophical vision of the future for the old service industry. First, I believe great utilization of sometimes utilization of floating plate will be stronger than other. Likewise for jack , the same also applies to vessels, seismic, pressure pumping and all of the field assets in operations. Sometimes, International market will be strong then in US. I suppose during some period backlog will build, other times manufacturing right will exceed, the order write and backlog will decline. Production support services will generally be more stable than exploration services. Commodity prices will vary. The reinvestment rate will fluctuate. Deep-water activity where potential discoveries are huge will be less assessed, while short-term variations in demand for products and services. And lastly all four-construction companies will struggle to consistently profitable.

I am not trying to be . It is just a simple facts in light all service sectors. I may be 56 years old with 30 experiences in this sector, and you may not be 30 with 6 experiences. Yet we share the same observations. The landscape ahead looks about the same as what we see in our review . It is true, the more things change the more the stay the same.

Now for the really important part. The relevant part. Oceaneering strategy is build on the the more technical niche markets we serve, whether they be in drill support, development products or installation services or most specially production services the more fundamentally sound and stable our financial performance would be the cycles of our. Since we participate in each phase of offshore lifecycle, we see all parts of this cycle in hold. And we did that on purpose. In our need to our stories is true, we appointed two major leading indicators in our business. Floating rig utilization and subsea completions. Both the install base subsea system and now it is being installed as a two most important indicators. How do we actually depend on variety of market drivers that arouse, because operators choose to operate offshore especially in the deep-water areas. We provide worldwide coverage with our products and services. As domestic activity is down, international markets are usually more profitable. The drilling is down. Production activity is almost well . And since install base in subsea system is constantly raising and requiring a medial type of actions of all source of new and unforeseen problems and our opportunities are continuing to expand, just like in the cartoon . I may not be able to list all the unforeseen problems, although, I guarantee that Oceaneering will see them. This is especially important point for those of you who know Oceaneering well. You can see exactly how being a technical problem solver exposes of to these opportunities. It is always reassuring significant efforts on profitable long term contracts and we will also do that. And it is always the advanced technology segment, that is not even affected by the oil field of today. So what easier to understand is one trick with one lot of business. We believe in our depth to support our strategy to focus on niche market throughout the large cycle. Which is going to help lower the cost of finding, developing, and producing half of the carbon reserves for our customers. I don't believe we have completely transformed Oceaneering, we have come a very long ways. We are no longer the worlds largest company. We have exited discommodity business in all markets except the Gulf of Mexico and interesting enough last year we did more diving work the oil field than we did in the oil field. Today, we are truly a unique company providing technical solutions to a variety of problems throughout of life cycle of the offshore business. We are world's largest ROV operator. We are the world's largest provider of products. We have the unique ability to offer low cost solution using assets and our products especially in the medium phase of the lifecycle. And best of all our brand name in the oil field is allowing us to bring new products and re-ramp services to an industry focusing on lowering its cost. While we will follow the general cycle commodity products in reinvestment levels. We believe our technical niche strategy will moderate the low points and give us an excellent leverage to a more opportunity times, that we will see in each succeeding cycle. I want to apologize for this slight de-tour, feel like I am running through the office in oil field here.

Our oblique that our performance is a great tribute to a well-executed strategy and we will see through that you could meet all our employees of Oceaneering in the .

Now I would like to talk about the operations in some detail. The record quarterly other services revenue in gross margin highlighted the first quarter 2002. We haven't had the opportunity to highlight other services recently and many of you who probably wondered if the gross margin percentage would ever exceed to 10 or 11%. All based on the strength of power sales and profitability for Gulf of Mexico subsea installation project work, and work for our two interventions households of significant engineering and specialized diving services contract as well as increased demand topside inspection services. Our other services segment contributing gross margin of 16% or $5 million for the quarter. We always believe the services in this segment could be substantially contributor in the market with a reasonable degree of activity. Achieving 91% intervention vessel of utilization during the first quarter was a nice accomplishment and demonstrates and potential demand for lower cost alternatives of distinguished Oceaneering from other offshore construction contractors. And the good news is we see substantially carry over of the current work in the second quarter as well as the unforeseen work that we know is out there in the future. This is the good example of how serving multiple faces of the life cycle and technical niche in each of the phases can work to our advantage. When demand for the services may be down in one phrase, another niche market segment may be performing quite well.

Additionally we are pleased with the continued good performance of our subsea product segment. After recognizing almost $33m of subsea revenue in the quarter, our backlog was reduced by less than $4 million. We replaced 88% of the revenue we generated during the quarter with new works. Our backlog told $55 million on March 31st. As we indicated on our last conference call our UK plant booked the majority of the contract awards with deliveries under the large orders in Brazil and the slow tie back market in the gulf. We believe that we will continue to experience a decline in backlog at least for the next two quarter. How do we continue to believe the long term prospects or subsea product segment remain extremely bright. Most of you heard the statistics from a number of deep-water fields in development or evaluation and all of these fields will require our products and our services.

Let we move into our production services segment. The first quarter of 2002 represented the first time in Oceaneering history that we had three units under contract in operation for the quarter. And we hope we have many consecutive quarters, will that be the case.

Let me talk about Oceaneering contract. Our customer is not yet indicative whether they will elect to extend the initial contract period from 3 to 5 years. If elected the switch could occur in the middle of the second quarter. In exchange, we are extending the last two years to four years of the total five years in this contract period. We have agreed to reduce to their rate. As we agreed in the original contract the actual day rate was stepped down over the next four years. The decline was negotiated with our customer base on the goal to extend an economical life of the field, as the product decline, so is the day rate.

While the day rate for the second year is approximately $6000 less than it was on to the three-year term. The accounts will require us to use the average day rate over the next four years. So in the balance, you will just see as booked a differed credit since, we will be receiving more the revenue will be recognized. Then during the last two we will be recognizing more revenue then the current billings would indicate in the differed credit will go to zero. The net present value of the cash flow is better than the revenue string would indicate.

Now in form-4, if our customers looks to extend the terms in initial contract. The revenue will be recognizing will be approximately $19,000 a day, less that what we earned during the first year. Put this production into some economic perspective if elected to day rate over the remaining four years we will average approximately $775 per day to a million dollar of investment. You run the economics. This day rate even before considering the higher day rate earned during the first year generates an excellent return for our investment. I will suggest you; compare this 5-year economics in full pay back to most drilling contract for new or upgraded equipment and you will learn why we pleased. Having a fully paid asset at the end of five years and a desirable operating area with a lot of opportunities, it is exactly a kind of vast project we are looking for. Please note if a longer term is elected mass revenue and gross margins for subsequent quarters, we will be lower than that in the first quarter. We have also taken this in the consideration in the guidance we have given regarding 2002 and 2003. If the customer likes to extend the contract will be issuing a separate press release at that time.

Now lets talk about ROV segment.

The contributions made in the first quarter of 2002 where this entire decline from the preceding quarters level has lower utilization in the floating and drilling plate impacted our results. Last quarter, we indicated that annual gross margin contributions in this segment should remain in the mid to high 20's for 2002. So somewhere between 26 and 28%. Our margins during the first quarter fell slightly below our target range. We will have subsequent quarters with .

To give you an update on our mix data's in all of these segment, I would like to review the type of services of all of the fleets we are providing at the end of fourth quarter of 2001 and at the end of first quarter of 2002. Of our 124 vehicles at the end of each quarter, a 100 we were working in December 83 were engaged in drill support and 17 were doing other activities. In March 31, 95 vehicles we were working, 76 in drill support and 19 in non-drill support. These were snap shot and should be miss interrupted to indicate any permanent fleet mix. Let we point out that well 19 of the 35 working vehicles are working in non drilling operations and this may not seem like much, this percentage is expected to grow as more vehicles are needed to support production operations in construction activities. We go out of work here as these opportunistic characteristics is evident throughout our whole strategy. Our average day rate per day on hire during quarter was about $46,00 as compared $47,00 in the last quarter of 2001. So our fleet utilization dropped to 70% from 76%. Our average day rate remained essentially unchanged. The decline in margins was due to the drop in day zone hire in the hire maintenance cost. Advanced technologies had off quarter with margins of 13%, the lower results were reduced to demand for services and management for ROV that we provide to the telecommunication industry as well reduce NAFA funding and other contractual delays. However, nothing is occurred in this segment, that would lead me to conclude that financial contribution will not in line with that of 2001.

Lastly, let us briefly talk about our balance sheet.

During 2001, we told you we expected to pay down debt in 2002. In March 31, we had debt of $145 million and equity of 276. Our debt to capital ratio had been reduced from 40 to 34%. We paid down 21 million dollars during the first quarter and our cash balances grew from $10 million to $18 million. You have not heard me mention cash balances for several quarter because we had revolver to add outstanding and all available cash went to pay down debt. Today our $80 million revolver has completely replayed with cash flow from operations and we have $8 million more in cash and we usually keep from operating purposes. So expect to be a new reinvestment factor during 2002, as opposed to 2003. As we have followed on a couple of years ago. Our EBITDA during the quarter exceeded $30 million and in absence of any major capacity addition our capex was $7 million. Please take a look at the cash flow, our technical niche market strategy is generated and look at the visibility of our earnings in our cash flow continue. I think you will see a strong with resources to extend to its growth.

I just wanted to summarize before we take questions.

Our results for the first quarter slightly exceeded our expectations and continued to demonstrate our increase earnings capability. Our earnings visibility and our business strategy for 2002 and beyond remained clear. Our cash flows are strong and we intend to use them to grow the company. Our strategy is not based one trick pony. The market conditions we operate under vary and it is our intend to be profitable and continued to grow under a wide variety of situations. As we said in the past our other services segment as we believe that this segment will be a larger contributor to income in 2002 and beyond and most people get this credit for. As we better to find our low cost solutions to the market both in the development phase in the production phase of the life cycle. We expect to be involved in a wide variety of opportunities. Especially those unforeseen varieties that always seem to occur with the introduction of new technologies.

Thank you for your interest in Oceaneering. And now I would like to answer any questions thanks.

At this time I like to remind everyone, and in order to ask a question, please press star and number one on your telephone keypad. Our first question comes from the line of Jestin.

The second place is I thin that we start seeing enormous leverage in other services, had good utilization in this quarter on above of 2 vessels in the we can combine that with an Engineered solution in additional equivalent such as always, you know we didn't get some realy fantastic (indiscernible) and so when you start seeing big development activities when the construction company start to produce profits other services is going to follow that constrain. I could be enormously profit for us and when the construction companies again start to increase our activity that will come through us in margin and volume in our products we have got a lot unused capacity in the (indiscernible) and better than that we have got you know facility in Houston 15 acres in next door and about 100,000 (indiscernible) shop's price that is build in a wide variety of unique products and so I think that is going to take off so on. I am going to forward just the existing capacity that we have and this doesn't even include in the additional capacity addtion or any new investments that we are goign to see that. We have got to see a little better market in what we are seeing now. I mean, that I am not suggesting (indiscernible) can just swim against the a tired worn out, I mean that all companies start to cancel deep water programs then that is in some instances for sure that is going to delay or even effect the development sites. We just haven't seen the big money roll through in the development of (indiscernible) it is ours. I am very very bullish on our prospects as is and I am very bullish on the opportunities that we have to end that. So I don't think it is not a stretch for me to see us doing that.

Okay, thanks well. If the (indiscernible) cancelling John, (indiscernible) they will have a really happy celebration?

You know if I was the king of (inidscernible) right behind, I would wound anybody for (indiscernible). It seems to be a pretty rational, he seems to let others do all (inidscernible) like money in keep up fairly orderly marking.

Thankyou.

Well Good morning. I will actually limit to two questions, you know first one is back on the others services segment which really did surprise, I think quite a bit or certainly (indiscernible) in addition to the better utilization of the intervention vessels did you also say in the press release that (indiscernible) one major contract that happened in the period, that generated a lot of revenue and is that over with and not to be repeat or what?

That is continued in the seccond (indisceribile).

But you didn't offer any order (indiscernible) what there was, or did you?

It is not anywhere near the impact interventions as was are. As really as I said in the past, that other services segment is because we have the vessels is our proxy for (indiscernible) projects, then we have got some business and we have got inspection business. And what really dominates that segment is the profitability of the vessles. I would like just if we could ever grow the inspection business for instance with some new technology, you know we would publish separate this to business units and you did a clear picture of that. Right now we are just aggreated and under (indiscernible) but it is really driven by the utlization in the (indiscernible) in the deep vessels we have. We have also got you know some other (indiscernible) force that work and they get pulled along in the same opportunity.

This (inidscernible) I am not anywhere, as far (inidscernible) the manager there comes and asks Gilbert for a list of all the unexpected problems on this project and Gilbert turns to the audience and gives you a blank look, I can't give you all of the jobs, but as far as I can see we did 2 jobs last year, we don't have any jobs but this year for P&A and as I exalpined to audience. I don't have any wild expectations that (indiscernible)

Thank you, my second question actually relates to this and if you addressed it already I apologize, I was writing furiously but on these intervention vessels I know you are very optimistic about them and they did have high utilization in the period, going forward is your optimism or some other optimism about the high utilization related to the prospects for this joint venture, is it superior?

Just call as (indiscernible) in the deal. As far as we have made reference to this Gilbert Joe, manager there and he comes and ask Gilbert for a list of all the unexpected problems on this project and they were (indiscernible) gives you this blank look , I can't give you all of the jobs but as far as I can say we did two P&A jobs last year, we don't have any jobs both this year for P&A and as I have fought to explain to audiences is that I don't have any wild expectations that measure all major expectations 20,000 dollars a day is normally on the intervention style or both or even a large vessel of any sort, its not a huge (indiscernible) get on top of that well on the (indiscernible) say that you know a big overcome may would send you know the (indiscernible) out there to do a hell of a lot of that work. So, I am just using that really is you know that is proxy or is unexpected things. I guess I told Marvin that I should have identified a little earlier you know some potential jobs that with our drawing contracted background, we probably will succeed more than that other people do. But you know I just came main model for you right now, but Tom, the answer is it is superior and no forecast in 2002 does not consider contribution from that alliance. That is 2003 event. That is just another example of how increasing the service capability on the those vessels, but it is not taken into consideration in our 2002 guidance.

Let me follow up a little bit on that and say comment, we have got about 2 million dollars of capital that we just kind of thrown into continuing capital and we have call back, you know a defined incremental expansion of capability, although it really is and without that capital we could not do any sophisticated jobs, and reasonably sophisticated job. We now well as what it sounds like, and so without some tools we had an inventory from March group we couldn't' t have done a two idea and so we did and so that's going to develop over time and you know it could become a bigger market if you have simple intervention or it could not go into the big market, I don't know. I do think this important element is that oceaneering has got the engineering capability to be able to provide the product and service that used by those vessels to do that job. We are not simply in the universal business and we are in technical form solving business and we are learning more and more and our folks are learning a lot about commercial activities in a price and that work accordingly but the essence of that work is that we have an integrated approach that uses products we have and resources that we provide. The cover of our annual report you know way does sign and we are losing possibilities should (indiscernible) functions, it is exactly what this point stands for.

You guys have done a marvelous job of anticipating you know the unexpected opportunities and certainly you have got nothing to apologize for as these results demonstrate. So, have a good day.

The next question from the line of .

Well, I had some questions but I don't have any more. Nice quarter everyone. I will get off now thanks.

Your next question comes from the .

Good morning everybody. My specific questions have all been asked to and answered well so let me ask you a general question. John you mentioned earlier the delay in the industry in developing the major discoveries in the past 2 years in the backlog of development projects. Why don't you just give your opinion of what that is, is it after-shock of the collapse in cash flow over the past quarter or just a normal lag or do you think it is something more chronic than that?

I will tell you that's so like you know when the folks (indiscernible) they will all work on arousing depletion rights and sort of made that a flavor of the (indiscernible). I have seen some people allured to this but I haven't seen any analytical going in for that. I really believe that it has a lot more to do with the majors and the majors are dry in the deep water and that's where the big moneys come from. It just takes longer to put you know Exxon and Mobil and Aimco and Arco and the BP and (indiscernible) and Texico in the Chevron and Conco and Phillips. It just that natural inability to just sort of hit and to go on running and you know that first inclination is let's see how much money we can save and that really sort of stops any spend in and it seems that most businesses you concentrated on the revenue side or cost side and it is hard to be both at the same time and a lot for areas that as we see these mergers slow down, I think we will see a lot more organic activity when they have got enormous cash flows. They have got you know great hurdle breaks, I mean the hurdles like that the majors used are in the mid to hard teams for all production, so you got you know revenue numbers that at least in the upstream part of the business are well in excess as hurdles lights. So I think they even have to wait to obviously the hurdle lights are already there for them so we got a lot of money, they eventually going to have to re-invest that and I think they are going to look at this before the inventory and our bankers is going to be you know a considerable increase in activity, now the safety, the question is that when it will happen and I don't think, I may be better in knowing that in main guard here.

My name is your conference facilitator today. At this time I would like to welcome everyone to the 2002 First Quarter Earnings Release Conference Call. All lines have been placed in listen only mode to prevent any background noise. After the remarks there will be a question answer period. If you like to ask a question, during this time simply press star and the number one on the keypad and questions will be in an order would be. If you like to withdraw your question press pound key. In consideration of other participants please ask two or three question release from the queue. You may queue it again for additional question, however there is a maximum of three queues per person please. Thank you Mr Huff you may begin your conference.

Good morning,

John, I want to talk a bit more about the intervention of vessels, on a last conference call, you mentioned that you were little bit disappointed in terms of the backlog in the number of days that you had at that point. Looks like business got a lot better in Q1 from the time that we talked. Is that the case?

I think it is, let me say this it is really only placed in oil field that if you have got any backlog, that you should ever depend on is in the development side. That is the product that people buy and the product growth is sometimes is harder to differentiate to production services products from the construction products, and the capex price. That is why I calling it development price. So, I think what it shows is these vessels are probably going to be more profitable in the production phase or in the remediation phase then they are in the development side. The of this is that we can use them in both parts, we have focused on three primary sub market segments. The first one is the ability to do single and double well in the Gulf of Mexico in the deep shallow water. The second one is going to be a subcontractor to some of a more conventional construction companies and our ability to make all the connection under water that need to be made. You don't need a big stand in by to do that. And in the first segment is this remediation, that I am talking about it, the more connections you got out there, the more reach you are going to have, the more power you are going to need the more unique solutions to things to come up that are going to occur. We are not going to see that backlog, we choose not to show backlog on these vessels although we wanted to give you something and we haven't really figured out what is the best way to indicate that, because you are not going to see much backlog in the most likely segment which is the remediation segment. We believe business in the remediation segment or the production phase. We are going to some subsea intervention more. So I think the types of jobs that these two vessels are well suited to do, there is just a whole lot of opportunities and we haven't defined as probably as well as we can.

Okay, let me take little more further, when you look at in the Q2 and the rest of the 2002, do you think you can be able to keep the US intervention at about 90% utilization?

I think it is going to go down from that I think Q2 will be strong. Q3 would be less that Q2 as we see at now, and in Q4 we don't see as much. And what last year showed is that we actually had a little more utilization then we thought. But we are competing in some low type jobs. I mean if you think of the analogy of the drilling rate market I think that is a good one. When times are slow you all get the 300 foot jack ups drilling and hardly to water and getting 150 jack up upright. When times are strong, you have got those rigs moved up to you know 299 feet and they are getting four times of rise. Our market is going to be just a fluid may be perhaps even more fluid than that. As we find uses for these vessels we will move from a simple datametric survey, where we will pull in a sound to more a complicated subsea engineering project. That is where the leverage is going to be. I think that is the exciting news to me. Is that we have got a lot more earnings leverage in this segment than we even thought we had and that is the good news.

On the earnings leverage you did about 16% margin in Q1, do you think that type of margin is sustainable going forward in Q2 and into the rest of 2002?

It is definitely sustainable in Q2. I think it may go down, one point or so in 3, and in 4 it is a jumble.

Okay. When you touch on your free cash flow, you repaid debt in Q1, you mentioned that you are going to start looking at the reinvestments cycle now in 2002 versus 2003. What are you going to focus and what can we expect in terms of capital, and what are you looking to spend it on?

I think overall, just one word cannot answer that technology. That is slightly broad word than anything fits under it. We are clearly going to be looking at offshore technologies, I mean in order of preference, I will allow long-term good rights and return contracts. I don't that we will be able to dramatically, grow the fleet certainly not organically, but we will be consolidation of that, we will be looking at some technology associated with inspection services. We think that is the market that is going to grow. I am not sure if we are looking at vessel assets are not. It might be a little earlier for that to do. I would say perhaps I have to make a personal bid on it that subset products, would be a great opportunity both short-term of complimentary products are sit around the tree, that the news the umbilical is a focal point. Products little further out that are little more eccentric, you know, we want be touching those as well, that is multifaceted flow, was drilling. Those type of things you can combine operational as well as, as product knowledge. So we are going to looking after that, I mean, it is an opportunistic company that operates with a conservative philosophy.

Any senses to you capex plans for the rest of 02 and end of 03?

No, we don't have a firm .

Okay final question for me, you gave guidance for Q2, that would be a record quarter. You did 32 cents Q2 of 2001, consensus of 38. I mean it looks to me of everything I have heard that you can be above 38, above the Street estimates, is that fair?

We are going to keep it at 35 to 40 cents and you know, I think that is a fair estimate. It is a good estimate. Honest estimate. You know I am not standing back on in it, certainly not deliberately. You know you have got a lot move in place that is really a kind of harder way where I was saying, I mean it is a small cap coming. It is more complicated than lot of small caps, and we are trying to good guns without getting too far out of field. I think these are bright earnings, you know 35 to 40 cents is a spectacular job and you know as we make 42 or 44, I mean it will be more spectacular. But, you know to predict more spectacular over spectacular, I am not sure is a smart idea.

I understand. Thank you very much John.

Our next question comes from the line of .

Good Morning, this is Sandy how are you?

Yes good.

Did a great job, almost solved my question?

One of the young them said that Oh the restricting 2 and 5 questions.

My first question goes back to the guidance for the next quarter, I just want to understand, one, when is the deadline for which I tell you there was a change in your guidance, are you assuming the lower pay rate?

Yes, we are assuming the lower payrate in the guidance.

And what the dead line for them?

The deadline is in this quarter. I don't know the exact date of it and adapters I have dropped that point in the same.

With the customer relationships that we have is not probably a dropped dead date. Most likely we will be called in the middle of this month.

And you don't have any insight to what they are seeing on the field right now, you are in the kind of dark?

We are not going to free guess our customer.

We have given the guidance on a longer-term contract and so that is obviously where we think, when we give that guidance.

On the subsea backlog, I just wanted to understand, you mentioned it sounds like a different mix of product, it sounds like you booked more in the UK may be less than Brazil? I don't understand the kind of mix of product that you are seeing now relative to the kind of product that you are booking?

We are seeing an additional steel tube order, we are seeing some more of our conventional thermoplastic and we are seeing some proprietary product with hot resistance. So we have got a good mix. Our UK plant is doing well. It is darling of the organization, US is hotten. We are not booking orders there as fast as we would expect to. Currently we don't have the capacity to build large steel tube and build within the US. Last one we bought from the US market came from the UK. The US market is definitely going to heed up. It is the largest deep-water market in the world. It is on all of the deep water, well not all of it, but considerable amount of it is going to be developed in subsea techniques. So, it is really a matter of time we believe before the market .

I suspect this thing is going to like us involved in the remarks. You know, who is going to US is stronger than Brazil and it is going to be vice versa. So you asked why are trying to diversify your capacity. I think the one clear thing to meet all that is that we are all operating all three plants as we unified the production facility, as opposed to what we essentially did in the beginning, which was to have isolated de-centralized profit center. I think we are doing a much better job of execution narrowing particularly making components for different jobs and different places. I think that is a good sign.

Let me remind you what we said in the last quarter, we just gave an indication of what our January orders were like, and we said that there were good orders booked by the UK plant. One of them was the steel tube order for Gulf of Mexico, another was an order for and the largest was a thermoplastic order for West Africa. So while they need to get booked by the UK plant. I mean it is not indicative of any geography.

My last question is on SG&A, just looking at the progression and making assumption of the fourth quarter, you may had something to do with performance related competition, one of that was the rate that we saw this quarter was closer to the normal number?

I just say, I mean the balance.

Okay. Thank you very much.

The next question comes from the line of George .

Talk a little bit about the outlook in ROV area, with the margins, for which from the first quarter and understandably move a little bit about, what has happened in the deep water drilling area? And as you lookout John relative to your indication that 95 units in March, 76 in drill support and 19 in other, can you review the second quarter and going forward into the second half? Do you view the possibility that the other is going to pick up by specific number, could you give us any guidance, as to how that make up might change and what it means to your second quarter margin, can we look for some recovery in the margin versus the first quarter?

I will try to address that in the speech. It is surely a good question, a valid question for sure, I do believe as I said in the opening remarks that the margins are going to improve and that is the result of the revenue that is really a result of more than 19 units being used throughout the second quarter time period in the construction phase of the lifecycle and the development phase. We make a little more money in the development phase in some projects particularly when we have larger crews to operate, around the type basis, it is a sort of pull out like a rig support. The offset of that are we up more equipment more than in the construction phase. The one of things I learned in Western, and other places is that when you equipment is on and less time, you probably spin more money, so when your utilization is down, you get a kind of double whelming. It goes back to shop. It gets printed, fixed up, so you get some more cause. That really was the problem in margins in quarter one. There is good cost in bad cost. The good cost is that when you have equipment is going to operate lively offshore, and that is what our reputation is build on, that is good cost. When all you are doing is just kind of slapping at it, that is bad cost. So I was pleased with our overall cost control we had. We had some umbilical issues that were straightening out. My answer wouldn't get at the end of the broad. So we are going to have 21.7 average units during the second quarter in the construction market and there are too many variables in doing that. But I do believe there will be and we are focused on that, because obviously, you have got the intermediate war debts, a sort of 400 to 1800, 1500 feet where you have got a lot of rigs that are shut down there. In the offshore deep water those programs are continuing and more less and not a whole lot of oil equipment that is capable of working in greater than 5000 or 6000 feet of water.

There are more ROV's going to be used in production support as deep-water production continues to.

That is a good point Marvin, we have got four or five units right until in the Gulf of Mexico, with the issues surrounding spark technology, I am sure we will probably put more of that.

Okay. Very good. The second question on the maps area with this potential transition to a longer term contract that, if you had a 44.5 gross margin, in the quarter. How will that change, assuming that the contract gets extended? What would be you guidance in terms of the comparable margin?

George, What I would do is what we gave is very clear. The average data rate from the accounting standpoint is going to be recognizing would be 19,000 dollars a day less. And you would be able to subtract 19 times the number of days in the quarter out of revenue and gross margin, for a full quarter. That would be for the first time that would come up would be the third quarter.

Okay. I guess my question is I understand what you are saying, but is possible that if you go through the mathematics on that, that you can still come out with gross margin in the 44 range?

I don't see how you can do that.

All right. And then lastly, as I look at the kind of numbers that you are coming through with getting closer around, harboring around the 40 cents per quarter range, if you were to look at the moving in that direction and staying that range in the second half, obviously you need that to get into the dollar 50 plus range and then you are talking about guidance of up 20 to 30% next suggests a dollar 80 minimum. How do you make the transition from 40 cents, and what it is going to have to be more or like a 45-cent minimum, may be 45 to 48 cent minimum on a quarter basis? How does that get after?

That is a great question, and I think it is really very clear to me. We have got lot leverage in all of this segments, we have got enormous drill rates go back to work. You know, we don't have quite a double hit that the drilling contractor give, what we get enormous increases in drill rate, but we get capacity utilization and that is a change in our gross margin in all our business. That is dynamite business and that thing could go through the roof with the big market.

You know take a couple of is there any indications from talking to , Mobile and BP now that their are the major acquisition have been fairly well. They are loosing up a little bit or?

I do, I got sense that those three may come to effect. I mean I think BP is defined on Gulf of Mexico. Is a priority area for it. I think

It has lost a (indiscernible) battle on North slog. This area, this region is going to be one of the main areas for development of articles. I mean the deep lying areas are the only reason deep water is worked it down is because you have got reserves that are a lot larger because nobody has really explored that and the most important reason is that you can produce a the hell out there. You know one major has got 200,000 wells the productions facility and producing with 7 wells. So I mean you have got enormous productivity in these wells and with the advances in well completion technology. You know the operator connected to that is the case. Something is going with . I mean there are obviously you know trying to move ahead as fast as they can and I think that the deep water is the only place is probably been initially disappointing and I don't think it had enough really good looks at any time is probably in reserve. is probably one of the most advance deep-water operators in the world? They are very smart and very very capable. So I guess the only threat I think of you know aloud would be just the whole issue is Soviet Union and Russia. If the politics there were suddenly disappear and regime or right for you know additional you know whether they will buy the Russian oil companies or will they organic explore you Russian I mean by that I mean the comprehensive Russian former Soviet Union allies countries as Uzbekistan, Kazakhstan and so far. You know but they have been trying that for years and years and that seems to be real colorectal mess. So I think eventually the strategies we have got are more feels on the development in the deep water then currently production, is twice as many under evaluation as currently under development. So there is a great inventory already. While the exploration as slowed down a little bit they have more to do then they have got exploration. So its real (indiscernible) of demand and I think set on a you know a nice position here I mean Oceaneering is going to benefit from.

Okay thanks. Nice to answer so well, thanks.

Thanks for your question and I thank everybody. Is there any other question.

The next question comes from the line George.

My follow-up question was answered. Thank you.

Yeah. I thank everybody for joining us today. We will look forward to see you, when we begin in August. I generally appreciate everybody's comments. You have got good questions. I genuinely appreciate you know your courtesy in helping us understand what the best strategy is because an opportunity to listen to you as and then, which you pick up from all these other companies. Thanks very much.

That ends today's conference, you may now disconnect.