Oceaneering International Inc (OII) 2003 Q1 法說會逐字稿

Good morning. My name is Tamara, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Oceaneering Intl Inc first quarter 2003 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press "*1" on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you. Mr. Huff, you may begin your conference.

Good morning, everybody. This is Jack Jurkoshek (ph) , and I'd like to thank you for joining us on our 2003 first quarter earnings conference call.

And I'd like to particularly welcome those of you who may be participating in the webcast to this event. Joining me this morning is John Huff, our chairman and CEO, who will be leading the call, Marvin Migura, our chief financial officer .

Remarks made during the course of the call regarding our 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'm now going to turn the call over to John.

Thank you, Jack. Good morning.

Appreciate you joining the call. It's a pleasure to be here with everyone this morning. We had a really good quarter. Beating the consensus estimates in generally poor oil field service conditions prevailing for the last six to nine months is ok with us.

One noteworthy point is we continue to have a positive profit contribution from all of our operating business segments. To be profitable in every segment speaks volumes for our niche market strategy, and we're pleased with these results.

Net income was down both year over year and sequentially, and this was well detailed in the press release. Our ROV, sub-sea products and oil field projects business activity levels we believe are in the process of picking up and we still expect to have an excellent 2003.

At present, we anticipate 2003 will be our second best year ever. We believe our quarterly earnings performance validates again our technical niche market strategy. Our focus on providing products and services for deepwater, sub-sea completions and mobile offshore production systems is a good way to play the entire offshore life cycle from exploration through production.

The bonus of participating in differentiated technologies and being able to develop synergy between all these niches is just icing on the cake.

Quarterly EPS of 25 cents was at the top end of our guidance range and exceeded the street's consensus estimate. I believe when you compare us to larger diversified services and products companies, we do extremely well. If you compare us to the offshore construction companies, we're a shining light. All in, I think we have created an excellent business model and executed our business strategies in a professional manner.

Operationally, Oceaneering's activities are getting safer more effective. Inspection and NDT services grew significantly due to the OIS acquisition. We expect to see improved profitability as we integrate Oceaneering's culture into the acquired operations. It calls an increase in SG&A, which was in line with what we expected.

In the first quarter, our ROV fleet utilization rate was 64%, down from 70% a year ago, and last quarter, and both revenues and gross margins declined year over year and sequentially. The decline in revenue and gross margin was solely attributable to lower fleet utilization. Available units remained at 125.

To give you an update on the mix of business on our ROV segment at the end of the quarter, of 125 vehicles, 102 worked in March. 81 in drill support and 21 in non-drill support activities. This compared to 95 vehicles working a year ago, or 76 -- where 76 were engaged in drill support and 19 in non-drill support activities. These are snapshot positions and should not be misinterpreted to indicate any permanent fleet mix.

Our sub-sea products segment had a sub-par gross margin quarter, although our backlog increased from 23 to $31 million at quarter's end. Bidding activity remains strong, and we expect our backlog at the end of June to be higher again. Our main concern continues to be project delays, which is perplexing and inconsistent with the current high commodity price environment.

Our mobile offshore production business had another outstanding quarter. All three of our MOPS units were under contract for the entire quarter, and we expect them to remain so for the indefinite future. Our quarterly sub-sea projects revenue and gross margins declined significantly. Utilization of our ocean vessels was 51%, down from 91% last year, and 81% last quarter.

Engineering and diving services demand also declined. We are, however, seeing signs of a pickup in activities for our services in the Gulf of Mexico, and we expect a considerable improvement in vessel utilization for the remainder of the year.

In the press release, we mentioned cost estimate changes totaling $1.9 million. Changes in estimated cost to complete contracts or settle personal injury claims are an everyday event in any business. There is nothing unusual about changing these cost estimates. Most of the time, we try to be conservative in our estimates, and this quarter's development proved we were a little too conservative. We mention this so you can have a better appreciation for our estimating philosophy.

The significant majority of this $1.9 million relates to one complex project awarded some time ago. The project had several phases that were accomplished over a number of quarters. The project is complete, and the favorable revision to estimated costs or you may call it a cost contingency which was not required, approximated 10% of the associated revenues. It is always easy to determine whether you are over or under accrued once the project has been completed.

However, during the life of any project, estimates are continually being revised. This is not news and it should not be considered as a non-reoccurring event. As I said earlier, revisions to estimated costs to complete are a normal part of businesses using percentage of completion accounting. At Oceaneering in our oil field businesses, we have two segments, sub-sea projects and sub-sea products.

I'm not going to divulge any more details of this project because I want our specific job and customer information to remain confidential. Advanced Technologies also had a very good quarter. This was the second best quarterly gross margin performance in two years. Our non-oil field business was generally up across the board, and specifically was better in our theme park business. When you can contract for higher margins and improve operating efficiencies, good things do happen.

As always, Add tech includes a mix of routine and opportunistic jobs. As we explained last quarter and in the 10-K, unallocated expenses consist mainly of incentives and deferred compensation related to our operating segments. The accounting rules have injected more volatility in this line that than before. During the first quarter, unallocated expenses were lower than last year as a result of a declining Oceaneering share price. While this volatility can be a bit unnerving, let me point out that the variability of unallocated expenses is greatly outweighed by the vagaries of offshore market activity levels.

Now I'd like to briefly address our balance sheet. At quarter-end, we had debt of $116 million and equity of 309 million. Our net debt to cap ratio was 20%. We spent $38 million on CAPEX and also repurchased 505,000 shares of Oceaneering stock.

At quarter end, our $80 million revolver was un-drawn and available, and we had $40 million in cash. With net debt of $76 million, we're in great shape and ready to invest.

Our operating income plus depreciation during the quarter was slightly more than $25 million. Please take a hard look at the cash flows, our technical niche market strategy is generating, and you should see an excellent business model being well executed. When you understand the visibility of our earnings and cash flow, I think you'll see a strong company with significant resources consisting of unique technically advanced assets and excellent people who have the ability to leverage these assets as offshore markets improve.

At this time, we're keeping our 2003 EPS guidance to the range of $1.40 to $1.60. In a macro sense, this range reflects uncertainty at what rate the offshore oil field market will recover. For Oceaneering, the question is one of timing. We started out slow, although we expect the quarterly profit contribution from our ROV business will improve during the rest of the 2003. We expect our ROV gross margin contribution to increase in a flat floating drilling rig demand market by virtue of the programs we put in place last year to improve both our marketing and operational efficiencies.

Over the balance of this year, we see a pickup in profitability, primarily from our international areas of operations, specifically Norway and West Africa. Late in the year, we could see an increase in the profit contribution from our Gulf of Mexico operations, as we put several systems to work and drill support service on floating production platforms.

We continue to believe in the strong growth prospects for our sub-sea business segment. It is only a matter of when in our minds. As evidence of this, we announced during the quarter we are requiring the largest steel tube umbilical(ph) manufacturing equipment for installation in our multi-plex facilities located in the U.S. and Brazil. This will be the largest steel tube capacity in the world.

New cable and machines for these locations will quadruple our annual steel tube capacity. We're in the process of locating a larger facility to install the U.S. equipment in. The equipment is anticipated to be up and running by the middle of 2004. The total CAPEX cost the equipment and larger facility in the United United States is estimated to be 35 to $40 million.

A number of announced orders by sub-sea tree manufacturers in the past nine months will require our products. We will bid to improve margins as the market starts to absorb the current industry plant capacity. 2003 may be a year reminiscent of 2001 when the first half was actually terrible and we made it all up with work in the second half.

The market outlook for our sub-sea project segment is more difficult to forecast due to the short lead time nature of our customers' demand requirements for mostly production phase remedial work, so we're continuing to take a prudent stance on what the demand for these services will be. We are making allowances for lower ocean intervention vessel utilization as compared to last year and a reduced contribution from our Gulf of Mexico diving operations.

As we have repeatedly noted, our MOPS segment results for 2003 are contracted to be down year over year, due to the Ocean Legend contract extension until May of 2006. Daily revenue and operating margins for the Ocean Legend will remain flat for the remaining duration of the contract extension. We are pursuing a few good market opportunities to expand our presence in the production arena, and hope to bring one or more of these to fruition during the last half of this year.

As I already mentioned, we anticipate a higher profit contribution in 2003 from our inspection and NDT business as a result of OIS acquisition. This is a business I hope that we can add capital assets to in order to improve margins. I'm confident we will do this. Again, it's a matter of timing.

Our ad tech business overall is expected to be slightly up from 2002. The quarterly gross margin contribution for the rest of the year on average should be about the same run rate as we reported in the first quarter.

Our 2003 EPS outlook of $1.40 to $1.60, we're projecting earnings in the range of 33 to 37 cents for the second quarter. 2003 is still expected to be a very good year, and will likely be the second most profitable year in the company's history. More importantly, we continue to see the earnings power just from our current asset base to be above $2.50 per share in a significantly improved market. When the market is there in all five of our oil field service segments are performing all-out, we have great leverage to higher activity levels offshore.

Certainly deepwater activities could be delayed even more than what has already been announced. However, my confidence level is high we'll see a reasonable market in 03 and our execution will persist at an accomplished level. As our technologies in both products and services become more reliable and cost-effective, we're sowing the seeds to grow our markets at a more rapid pace.

As far as our investment strategy, I think past performance is a good indication of our investment philosophy. If you followed Oceaneering for any time period at all, you should know we take a conservative approach to adding capacity and an opportunistic view to creating new market niches with our technical capabilities. We will not change our market strategy.

We will continue to invest in technical niche markets. We will continue to be conservative. We will continue to be patient, and we will not overspend for the sake of growth without adequate financial returns.

We're not afraid of making big investments when opportunities for reasonable returns present they themselves. In a phrase, we will continue to be conservatively opportunistic.

Applying existing technology in new ways to solve problems in the deepwater and sub-sea frontier is what Oceaneering is all about. Today we have the physical assets and the people strengths to earn much more than we see in 2003 markets.

The really good news is that we're continuously adding capacity, both through small asset additions and improved people contributions. With our added strategy of taking a harder look at possible acquisitions, I am confident our next round of major investments will take us well beyond our current record earnings.

So far in 2003, we completed three acquisitions. OIS international inspection PLC, a global provider of non-destructive testing and inspection service was closed in the first quarter. Reflange, a specialty manufacturing operation to expand our sub-sea product offering, and Nauticos was acquired in April. Total Cap-ex cost was about $36 million.

We also repurchased 505,000 shares of OI (ph) stock in the first quarter. We have purchased 793,000 of the 3 million that was authorized last fall. This is about 26% of the authorized amount. The OIS acquisition more than tripled our international inspection market presence, and the total annual OI revenue in 2003 from this business activity is now expected to be about $120 million.

We're the world's largest provider of inspection and NDT services to the downstream oil and gas industry. I expect this acquisition to be accretive this year and more accretive within the next two years. Added EPS in 2003 from OIS will be principally the result of consolidation savings through elimination of redundant office personnel and shore-based facilities.

The big up side we expect to realize is by offering the existing technical capabilities from OIS to our SoluShaw(ph) customers and vice versa. We now have the ability to operate our inspection team seamlessly around the world. Together with one other competitor, Oceaneering shares approximately 75% of the pipeline inspection market Both of us are about the same size, although we focus more on the offshore and out of the way trunk lines than they do.

I believe with natural gas enjoying the clean energy label and with LNG bets being made by the super majors around the world, this service segment will benefit from long term growth.

Reflange positions us to expand our specialty sub-sea product offering to include coli-connectors (ph), pipeline in-connectors, tie-in systems and special purpose fittings. Nauticos brings us a book of business related to the U.S. Navy which provides us with the opportunity to pursue new business with them.

Now I'd like to summarize our current status. Our results for the first quarter again demonstrated our ability to generate good earnings in a tough market. Our business strategy for 2003 and beyond remains clear. Our cash flows are strong. Our strategy is not based on a one had one-trick pony. The market conditions we operate under vary and it is our intention to be profitable in virtually any market scenario and able to grow under a variety of situations.

As we said in the past, do not ignore any of our business segments. For instance, our Other Services segment was a larger contributor to income in 2002 than most investors may have thought possible. As we better define our low cost solutions in the market in all phases of the life cycle, we expect to be involved in a wider variety of opportunities, especially those unforeseen varieties that always seem to occur as the industry moves to the newer technologies.

We intend to profitably grow our company to help our shareholders increase their returns. I believe our hidden asset is our ability to convert our immediate cash resources and balance sheet strength in the 2004 EPS. It is our intention to be more aggressive in this area.

We have clear objectives to improve our operations. We have outstanding people to execute our activities, and we will not be satisfied with mediocre results. I appreciate everybody listening to the comments, and we'd be happy to answer any questions. Thank you.

At this time, I would like to remind everyone in order to ask a question, please press "*1" on your telephone keypad. In consideration of other participants, please limit your questions to two or three per queue. You may queue in again for additional questions. A maximum of three questions per person, please. We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Richard Leader (ph).

I'd like to ask sort of two things tied together. One, just if you had any general observations or had picked up any feedback from your time at the offshore technology conference this week that was particularly enlightening, number one. And number two, do you sense that some of the drags in on the oil service business, things like the Iraqi war and Venezuela, the conflict and the strikes in Nigeria, things like that that have started to settle down now, are an important turning point for the industry? Do you feel like we've put those behind us?

Well, thank you, Richard. It was -- I was out there Monday most of the day at the offshore technology conference, and I guess my general observation was that it seemed reasonably upbeat.

I think the people were stopping at the booths, people were generally interested in new technologies. I may not be the best person to observe that. I mean, if you're a hammer, everything looks like a nail, so maybe I'm just more absorbed with the new technologies, but I saw a lot of small booths there, I saw a lot of things that were very interesting, and it was the little things.

Of the major customers that I visited with, they're in that upstream area in the production and exploration area. Their attitude seemed to be that the spending was going to increase, that the capital budget constraints that had been -- they'd been looking at, the general economic status, particularly the uncertainty surrounding the Iraqi war and where that went as far as the war on terrorism is concerned and just sort of the general gloomy business news was being replaced with a re renewed effort to expand their activities.

Now again, I think these customers are really focused on improving their returns, and I think that's the challenge for the oil service industry, is that we're going to have to add more value to these folks. So overall, I thought it was a good visit.

Your next question comes from George Gaspar.

Yes, good morning. Great quarter, John. First question is on the inspection NDT area, I'm gathering that your thought is about 120 million in revenue stream for the year, so you're looking at this trending 30 million a quarter. Can it be expected to be pretty flat in terms of a quarter to quarter performance?

And then on gross margin, it was 10% in the first quarter. How do you see that gross margin going along going forward?

Well, it's going to be pretty flat.

Here's a bet we made, George. We made two bets. We took one bet out of the play book of a company that I have a great deal of respect for that has created a lot of cost synergies. I haven't been as much of a champion of that in the past because I thought creativity was really our biggest leverage point. In this particular circumstance, I think we're going to be able to take a fair amount of cost out of the combined entity. That in itself will be, you know, improve the profitability of the thing.

Secondly, and this is where I think Oceaneering, at least we should be shining a little bit, is I think we can add some assets to our inspection business, and try to differentiate what we're trying to do from some of the competition in that business, and that's where I think the margin is going to improve.

I really don't have a set timetable. My guess is that it will take, you know, at least all of 03 to integrate to people and to generate a little more entrepreneurial spirit in the group. Clearly our guys in Aberdeen are getting their hands around that right now. So I think 2004 is when we're going to start to see improvement in the margins.

Ok. And secondly on sub-sea products, margin obviously slid here, in terms of the kind of revenue flowing through. How do you see that in this quarter? Is it just clean, the backlog that you have now, lower margin business, or as you turn your backlog over, can you get this backlog turned around even at the current rate of backlog, or do you need something in the 50, 60 million range, let's say, in order to get the margin back up from where it was in the first quarter?

Well, that's a good observation. I mean, obviously we're not satisfied with the gross margin contribution.

It's not that we have intrinsically any bad margin jobs in the backlog. We are not going to bid that way. I mean, the long term here is one that we shouldn't be accepting low margin jobs.

Now, we've got to execute them in order to get the margin that we expect or that we bid in the thing, but we're certainly not bidding, you know, mediocre or average margin-type work, so, you know, in any kind of manufacturing business, there's a certain amount of cost absorption that's got to be taken into account, and that's a big part of this.

I think the rapid growth that we've seen in our OIE sub-segment of the products will slow down in 2003. I don't want to sound like the guy in 1840 that said that everything had already been invented, but there's just a certain amount of things that you can only keep a certain growth rate for so long.

The big upside for us, though, is in multi-flex and how we approach that market. We are probably a little bit late in putting the steel tube capacity in place, but it was very important for us to, you know, get the process down. We really had to understand -- the folks in Scotland had done a really superb job in ironing out the kinks and that, and I think we can export that capability to both Brazil and the U.S. in short order.

On that, John, what kind of capacity do you think -- or let's say percent of market do you think you can capture once you're operational?

Well, great question, George, and that's why I was saying we're probably a little late in the steel tube, because that was, without a doubt, the fastest-growing sub-segment of the umbilical market. And right now I'd be hesitant to predict, you know, what percentage of the market we'll get. We'll damn sure get a lot of it, and we will see a big growth in it.

It's a matter of what is our capacity addition do to the whole marketplace, how fast that comes on stream and, you know, just sort of -- our attitude is, we're not going to worry too much about it on a quarter to quarter basis. I'll be frank with you about that. I'm really looking forward for that to be an 04 kind of spurt for us. I think that's when that's going to happen.

Thank you.

Your next question comes from Roger Reeve (ph).

Good morning. Looking at the ROV's, I know you gave a fairly good snapshot there this year versus last, is there anything you see that leads you to believe that that will improve significantly through the end of the year or any visibility into 04?

Well, I think that first of all, we have a program in line to reduce our maintenance costs on our equipment. Umbilicals are a huge cost burden for us. I think we've got some new ways to address that. Since we are the largest user of this equipment in the world, I think we'll come out with a little better mouse trap regarding that, something that's more allowable and more cost-effective, so I think the cost synergy for us is there.

I'm not sure that we're going to see a lot of the intermediate drilling rigs go back to work, but again, you know, this is a utilization game for us. We don't have quite as much price leverage with utilization as the drilling contractors do, for instance. So it's really more of a utilization, we see, you know, plenty of rigs moving to West Africa, we see some additional activity in Norway. Norway seems to always be cognizant of operator needs, and they stimulate that sector for us.

So overall, I think that we should get back up into the low 70's type of a utilization rate in 03.

Ok. And you referred to the sub-sea products probably a repeat of 2001, I believe it was, in terms of a much better second half than first half. Can you give us an idea what visibility you have in terms of projects or in terms of the backlog that grew slightly in the first quarter, how that transacts, or what could push that into maybe the fourth quarter or even into 2004?

Well, I mean, it's all in the backlog.

I mean, when you see the backlog going up and how much we're going to complete in a certain time period, that really is the forward indicator for you folks, and as I told George, I mean, we're not bidding this thing to generate business. We're bidding this thing to generate good financial returns.

The market is out there, there's no question about that. I mean, just the level of bidding activity and the amount of named projects that are offshore that are clearly going to be developed at some point. So it's just a matter of, you know, trying not to be as concerned on a quarter to quarter basis as some of you are, and in fact, a little longer term perspective to it. I'm very confident that that is going to be there.

Hopefully it will be a repeat of 2001 where our second half, you know, is real gang busters for us. If it's not, hell, and it flops over to the first half of 04, probably.

Care to give us any sort of percentage likelihood on the second half 03?

What about 67.58% chance that it's going to be the same as 01. How's that?

I'll take that.

Final question, if I could. SG&A, you gave -- OIS pushed it up. What is the guidance? Fairly flat through Q1 through the rest of the year? Does it trickle up or down with the cost-cutting?

Hopefully it's going to trickle down. That's the sort of the a good republican saying. There's some of it embedded in there that, you know, we just have to get used to. I mean, it's a lot of offices and a lot of places there that we acquired with OIS, so that consolidation is going to take a little time.

Flat to trickle down? How's that?

That's fine. Thank you.

Your next question comes from Tom Ascott.

Good morning.

John, you mentioned that, you know, you've got the net debt down to 20%, you've been buying back shares, and now you're ready to spend. As you look across your spectrum of businesses, is there any one or two or three segments of your business that in your view is going to offer more opportunity to spend that money here over the next year period? Anything that's got your attention more than other areas? I would imagine with ROV 's at 64% utilization, you're probably not anxious to build a whole lot of new equipment in that market here in the short term.

Well, I think the -- I mean, it's a great question, Tom. And the answer is that more than likely, the opportunities for smaller acquisitions in the area of the sub-sea products business where we can surround the tree with our type of things and then use those surrounding products to pull services from our sub-sea projects group into place, that's really the best synergy for us and should have high rate of return opportunities.

It's a matter of how much we can do. That's why we did beef up the staff in that area. That's why we're moving forward along those lines. I'm sure we'll continue to be opportunistic. I've got some, you know, good feelings about our production segment, where there are some opportunities out there again. It's just we have to be real patient with that.

I guess long term, if I was looking out, you know, five or six, 10 years, then no question in my mind that there's going to be more products associated with the sea floor than there are now. And that's a place that we want to be. We don't want to get too far out in front of that curve because then you're carrying all that excess investment and you're really not getting adequate returns on it. It's a tough game to get too far out.

In terms of just one company, you know, it's hard for Oceaneering to match up with just, you know, one entity in anything. We think that we'd probably be able to grow the company with a the smaller acquisitions very effectively.

Well, you've done a super job and we appreciate it, and it looks like today you made good progress in trying to erase this valuation discount that's been talked about so much. Thanks again.

At this time, you would like to remind everyone in order to ask a question, please press "*1" on your telephone keypad.

You have a follow-up question from George Gaspar.

Yes, thank you. John, interested on the ROV side, you've increased your utilization or the total ROV's in operation from 95 a year ago to 120, I believe you indicated. Is that correct? No, excuse me. You have 120 but you've got 81 in drill support, 21 in non-drill, and that's up from 76 and 19. Is that right?

Right, we've got 125 vehicles --

125? Ok.

George, and some of that is older equipment, and we'll be replacing some of that older equipment. We're not adding any capacity. That's really the metric that we're trying to give you, is that we're not adding capacity to that segment.

Ok. In terms of this increase from a year ago, from 76 to 81, 19 to 21, how much of this is outside the Gulf of Mexico? Or what's inside the Gulf of Mexico?

That's a great question, George, and I should have the answer to you. Can I have somebody call with you that answer?

Ok.

I apologize for not having that immediately available.

I'm just kind of interested simply because the recount on a year to year basis, the Gulf of Mexico was 120 last year at the end of March, and --

I mean, where we can probably, you know, have a big impact would be these -- what we call intermediate water depth rigs, and that 1,000, 2,000-foot range. That's a place to watch it

Ok. And in the past couple quarters, you've talked about this experimentation, I believe, that you're working on in sub-sea well hit intervention, that you were teaming up with Superior on?

Right.

Can you give us any thoughts on how that's coming along, and are you still in pre-experimental or pre-first well stage on that?

We're actually in the market.

We're doing some plugging -- operations. I know we've got them scheduled. We did some last month.

But it's not a big segment. We're not talking about big money yet. I do think, though, George, and that's a great question, is second half of this year, I'm going to be real disappointed if we haven't done some small remediations inside the well with superior.

I think that, you know, you mentioned a good point here, and I'm not a big proponent as most of you know that there is a non-drilling vessel that has got this drilling capability without the drilling vessel cost. I mean, I just don't think there is such an animal out there. And so our objective is very modest in this regard. I mean, you know, we're not trying to go in and pull tubing out of the well and replace tubings and so forth. I mean, we're trying to change production zones.

So we're going through a strong marketing process with our customers that we believe is kind of longer term thing now. I know this is, you know, any kind of time frame you're developing new things, it probably takes a little longer than you want it to, but the key kind of example I could give you is that if we can get the customers to believe that they can change production zones with a wire line tube and they don't have to go out there with a big drilling rig, then I think what we're going to see is an increase in multiple zone completions in these -- particularly in the single/double-well tiebacks when you can go in with our equipment and go in and change that production zone and you wouldn't require a big rig.

So that's where our market is, and it is a pretty narrow niche. I mean, to be honest with you, it's a pretty focused niche. I've got a lot of time for it. I think the P and A is going to come. We'll probably have competition in that regard, but the ability to do stuff inside the well with this sub-sea lubricator system is -- I think it's going to be fantastic.

Ok. And a follow-up on your ROV comments to questions previous. You're indicating that you can get back up into the low 70% range in 03 for utilization. As you're moving forward from here, you had a 25.3% gross margin on the first quarter ROV. Can you trend upward from that point starting in the second quarter forward as this utilization comes up to where it was at 64% in the quarter?

Absolutely.

Ok. Would you see more of that happening in the second half as opposed to the second quarter?

Yeah. I think this is a second half deal. I mean, we're going to get some help from the market. What I'm saying is, we also have some built-in help that I think, you know, at least compared to last year's costs, you know, we should have a little better handle on our ROV maintenance costs.

Ok. And one last one. On sub-sea projects, you did 12.5 million there. How do you view that number going forward on a quarter to quarter basis in revenue stream and the profitability was 18% in the quarter.

It should go up, George.

There's really sort of three components, two major components. The first one is the day rate on the vessels. A lot of jobs we have are day rate driven. They're denominated by day rate callout, since we have an integrated service with ROV where we go and do something either in the construction phase, more normally in the production phase, we do some kind of remediation activity, day rate.

We're also bidding more and more jobs, you know, particularly in that small job category of 8 to $10 million fixed price type jobs where we're laying the umbilical flow line and connecting up a sub-sea tree. I mean, personally, I really don't understand why they're not doing more of that. To me, the economics there are just fabulous. I mean, the ability to tieback a small pod of gas to an underutilized platform facility is the economics are just enormous.

So I have been surprised that we haven't seen more of that. We're really geared up for that, so those are the two main things. You know, we do have some Gulf of Mexico diving business in there that is going to be a little bit obscured. Last year we had a really amazing project, fairly high-tech deal with Spar (ph), and so I don't think that we'll repeat that this year.

Ok. Thank you.

George, let me answer the question about ROV's.

First of all, as you pointed out, while 102 worked this March versus 95 last March, we did have lower utilization this year, 64% versus 70, so I want to make sure that we get -- while more vehicles worked this March than last, utilization for the quarter was down this quarter versus last, and the improvement from March to March was in foreign. Gulf of Mexico was flat, and the increase in the number of vehicles that worked were in foreign waters.

Ok. Thanks for that explanation.

At this time, there are no further questions. Are there any closing remarks?

I just want to thank everybody for the opportunity to present our story again. We've got a really neat company, and I enjoy talking to you and anybody that has any comments or ways to improve it, I'm a welcome listener. Thank you for joining us.

This concludes today's Oceaneering international conference call. You may now disconnect.