Oceaneering International Inc (OII) 2004 Q2 法說會逐字稿

Good morning. My name is Marianne, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Oceaneering International second quarter earnings 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. (Operator Instructions). In consideration of other participants, please limit your questions to 2 or 3 per queue. You may queue in again for additional questions -- a maximum of 3 questions per person, please. Thank you. Mr. Huff, you may begin your conference.

Good morning, everybody. This is Jack Jurkoshek, and I would like to thank you for joining us on our 2004 second quarter earnings conference call. And I would like to particularly welcome those of you who may be participating in the Web cast of the event being made available through CCBN.

Joining me this morning is John Huff, our Chairman and Chief Executive Officer, who is going to lead the call; and Marvin Migura, our Chief Financial Officer.

Just as a reminder, remarks we make during the course of the call regarding our business strategy, plans for future operations, and industry conditions are considered forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation and Reform Act of 1995. I am now going to turn the call over to John.

Good morning. Thank you for joining our call. It is a pleasure to be with you today. The financial results for the quarter were in line with our expectations. With earnings of 43 cents, we more than double those of the first quarter -- 35 percent better than the second quarter of '03 and equal to our record results reported in the second quarter of 2002.

It was particularly satisfying that sequentially, profit increased in every one of our businesses. This is what we had reported to you in last quarter's conference call. Considering the mixed oil field service market conditions worldwide, we believe our overall performance for this quarter was quite good.

Sequentially, ROV revenues and operating income improved in foreign areas of our operation, largely due to the Stolt ROV drill support fleet acquisition in mid-February and an improvement in construction service related demand, particularly in Norway.

Operating income during the quarter was the best-ever quarterly profit performance by this business operation, and was up over 40 percent from the first quarter. Year-over-year, revenue and operating income improved 35 percent, attributable to the combined effects of an increase in market demand in international areas of operation and the beneficial impact of the Stolt acquisition.

To give you an update on our mix of business, in the ROV segment -- of our 160 systems, 131 worked during the quarter -- 95 in drill support and 36 in non-drill support, or a 73/27 percent mix. This compares to 107 that worked a year ago, when we had 125 vehicles, of which 66 were engaged in drill support and 41 in non-drill support, or a 62/38 mix.

Please remember that these are snapshot positions, and should not be misinterpreted or reinterpreted to indicate any permanent fleet mix. That being said, given our recent Stolt acquisition, we would expect the percentage of our vehicles working in drill support to be more in line in the 75 to 80 percent range over time, as demand for floating rigs eventually rises, particularly those rigs in the intermediate water depths of 1000, 3000 feet.

Our average day rate for the quarter was $5635 per day on hire (ph), an all-time high, up $375 a day from the last quarter and up about 660 per day from the second quarter of last year. These improvements were attributable to geographical and job mix related changes, and our continuing ability to obtain personnel-related rate increases.

Our fleet utilization during the quarter was 67 percent, as compared to 69 percent last quarter and 72 percent a year ago. Year-to-date, our fleet utilization has been 60 percent, the same as last year.

Even at a modest utilization of 67 percent during the quarter, we established a new quarterly record for ROV days worked due to the Stolt acquisition last quarter. We are very pleased with results of this acquisition to date, and the future potential earnings, contributions, and returns to Oceaneering.

Our ROV segment, with a majority of the vehicles working in drill support, represents huge leverage to an expected industry recovery and the use of floating drilling rigs, particularly those rigs ready for drilling in less than 3000 feet of water.

Our Subsea product segment continued to show improving quarterly results, as we achieve both sequential and year-over-year increases in revenue, gross margin, and operating income, due to our higher backlog this year as opposed to 2003. Both multiplex and Oceaneering Intervention Engineering contributed to an improvement in results.

Product backlog at the end of the quarter was $60 million, up from 41 million at the end of the first quarter -- its highest level since year-end 2001. We believe this will enable us to achieve a major profit improvement by these operations in the second half of this year as compared to the first half.

During the quarter, we secured the first 2 jobs for our steel tube cabling machine in our Brazilian umbilical plant. And our Panama City, Florida umbilical facility is on schedule to be operational during the fourth quarter of this year.

Our Mobile Offshore Production business had another very good quarter, as all 3 of our units were under contract for the entire quarter -- as they were last quarter and last year at the same time. And we expect them to remain so for at least the rest of this year.

Our earnings contribution from our Medusa Spar investment, which is being reported as equity income from unconsolidated affiliates, was $2.5 million, up 1 million -- up from 1.1 million in the first quarter, as 2 additional wells were put into production during the quarter. Another well is planned to be put into production during the third quarter, and we expect the third quarter profit contribution from this operation to increase.

During the quarter, Murphy Oil announced their expectation that the first Subsea tieback well to the spar will be in production in the first quarter next year. We are very pleased with results of our Medusa Spar investment thus far, and remain optimistic about the future opportunities this represents.

Our Subsea Projects business, which is conducted in the Gulf of Mexico, is extremely competitive. Consequently, the operating income contribution continued to be more marginal during the quarter. The good news is, these operations remain profitable. In light of the market conditions, we find its performance acceptable.

The sequential and year-over-year increase in gross margin and operating income contribution was in line with what we anticipated. While I don't mean to overemphasize meager profits, when you compare our niche strategy in the projects business to many of the offshore construction companies, consistent profitability is elusive in this segment.

As all of you know, we do not consider this segment to be construction-oriented. Rather, it consists of a variety of niche sub-markets, where our assets are very, very competitive with those of the construction companies.

We did add a new modern diving support vessel during the quarter -- the Ocean Inspector. The vessel is equipped specifically to support 24-hour a day API underwater platform inspection operations using our manned diving business.

There are approximately 3800 structures in the Gulf of Mexico, and API inspections are required on roughly 570 of these on average per year, of which Oceaneering performs more than 200, for about a 35 percent market share. The Ocean Inspector is one of the vessels we use for this service.

Since delivery on May 26, the Ocean Inspector has worked 90 percent of the time, performing platform and riser inspections and repair work, including anode retrofits. It is currently booked for work during the entire month of August.

Our modern, 6-vessel fleet in the Gulf of Mexico enables us to offer a wide range of capabilities focused on lower-cost solutions to our customers, as opposed to the use of higher specification construction style assets.

Sequentially, the increase we reported in inspection revenue is related to the seasonal nature of demand for these services. The gross margin and operating income improved through our efforts to secure higher value-added work, specifically by eliminating small revenue jobs and securing more fabrication yard and pipeline projects, and due to the favorable resolution of previously disputed receivables.

Year-over-year, revenue increased largely due to an increased activity in providing services in Europe. The year-over-year increase in both gross margin and operating income reflect continued cost consolidation benefits from the OIS acquisition last year, our ongoing effort to secure the higher value work, and the receivables resolution.

Our ADTECH non-oil field business had another very good quarter, and produced its second-best quarterly operating income contribution in our history. In general, this reflects a gradual improvement in results being achieved by our efforts over the past few years to secure additional work from the U.S. Navy, which included the Nauticus acquisition in 2003.

Sequentially, in year-over-year operating income was higher on the strength of increased vessel repair activity for the Navy, and space-related product and service sales associated with putting the space shuttle back in orbit.

As far as unallocated expenses at the gross margin line, the sequential and year-over-year change in these expenses is attributable to higher incentive plan expenses, based on bonuses and restricted stock awards for approximately 400 people.

Operation summary in general -- I am very pleased with our performance, given the market conditions. Our second quarter was as we had anticipated. And we are looking forward to even higher EPS performance during the rest of 2004.

We believe our earnings performance in a lackluster market for the past 2 years has set us apart from many service companies involved in the offshore sector. Again, during the second quarter, each of our operating business segments generated a positive and improved profit contribution. I think this speaks well for our niche market strategy. I believe we have created an excellent business model and executed our strategies very efficiently.

I would like to go on and interview our financial metrics. If you add depreciation and amortization back to our operating income, we generated $33 million for the quarter. And our balance sheet remains in great shape. We had debt of 163 million, and equity of 396 million. Our debt to cap percentage was 29 percent.

During the quarter, we invested $18 million, including 9 million for our multiplex plant expansion. We had $190 million available for future borrowings under our revolving credit facility, and are continuing to look for accretive acquisitions with at least our cost of capital returns. We intend use our strong cash flows and balance sheet to further grow Oceaneering's earnings.

We have a strong Company with significant resources, consisting of unique technically advanced assets and excellent people who have the ability to significantly leverage these assets as the offshore markets improve.

As we said in the press release, we continue to estimate 2004 EPS of approximately $1.60. This is based on our present expectation of improved profit contributions during the second half from all of our oil and gas related segments and the Medusa Spar.

The anticipated increase in earnings is being led by higher Subsea Product operating income, both from Multiflex and Oceaneering Intervention Engineering; increased equity contributions from the Medusa Spar; improved results from inspection; and improved ROV operating income, principally due to the Stolt acquisition.

This estimate is predicated on a flat overall market for ADTECH and 4 of our 5 oil field segments. Market demand projected only for our Subsea -- proved market demand only in our Subsea Products group. Even after expensing an anticipated 1.3 million associated with moving our U.S. umbilical facilities, we believe the growth in product profits will occur due to increased umbilical sales and more specialty hardware from our OIE group, including a 4 years benefit from the 2 acquisitions we made in 2003 to expand our product offerings.

Umbilical contract awards in 2003 totaled 1145 kilometers, according to Quest Offshore. In 2004, umbilical awards are forecasted to grow to a rate commensurate with tree orders, to approximately 1600 kilometers. Further growth is expected in '05 and '06.

Two-thirds of the market during the '04, '05, '06 period is expected to be for steel tube based products. And about 75 percent of this is forecasted to occur (ph) in the Gulf of Mexico and West Africa. Consequently, the steel tube umbilical manufacturing equipment we have installed in our Brazil umbilical plant, and will be installing and our Panama City, Florida facility, will significantly enhance our competitive position to participate in these growing markets.

We believe the long-term use of Subsea completions is definitely one of the secular growth markets in the oil field. Consequently, demand for related hardware should continue to grow. The market is expected to show good annual improvement this year. And now it is incumbent upon us to get our fair share of the market.

In summary, given the 2004 market outlook for oil field services overall, we like our position. Earnings growth in 2004 of 30 percent appears to be well with our grasp. For specific EPS guidance, we're projecting earnings of 45 to 50 cents per share for the third quarter. The sequential earnings increase for the third quarter from what we just reported from the second-quarter is expected to come from higher operating income contributions from our Subsea Products, projects, inspection segments, and an increase in the equity income from Medusa Spar.

Revenue, gross margin, and operating income are expected to increase on the strength of power, umbilical, and OIE specialty products and control hardware. The market outlook for our Subsea Projects segment is difficult to forecast due to the short lead time nature of our customers' demand requirements for mostly production phase remedial work.

That being said, the market outlook for the third quarter is for a seasonal improvement over what we experienced during the second quarter. Consequently, we are forecasting a recovery in revenue and income contribution from these operations.

Overall, market conditions remain very competitive for the diving and vessel-based project jobs we confirmed -- we've performed in the Gulf of Mexico. And these conditions are anticipated to continue throughout the balance of 2004.

The one wild-card is always added work resulting from hurricanes during this time of year. And predicting this is much harder than even predicting commodity prices. We expect a seasonal peak in our inspection business during the quarter, as we did in the third quarter of last year, and are anticipating sequential improvement in both gross margin and operating income.

For our mobile offshore production business, the financial effect of our ownership in the Medusa Spar is reported as equity earnings of unconsolidated affiliates. In the third quarter, we anticipate this will contribute about $3 million to pre-tax income, as there will be production from the first 5 wells for the entire quarter. And we anticipate some benefit from the sixth well that is expected to commence production during the quarter.

I would like to just summarize our current status. Our results for the second quarter, again, demonstrated our ability to generate good earnings in a mixed market. Our cash flow is very strong. Our niche market business strategy is clear and working very well. We have operating leverage to take advantage of the expected upturn in Deepwater Subsea completion activity, as well as the drilling activity. We believe 2004 will be a very good year, and 2005 even better.

I appreciate everyone's interest in the Company. And we look forward to your comments and questions. Thank you.

(Operator Instructions) George Gaspar, Robert W. Baird.

Good quarter, John -- actually, a very impressive quarter. First question -- Subsea Products -- the backlog build looks good. Was that totally steel? Were there any thermoplastic orders in there?

Yes, we had some thermoplastic orders in there, George. I do not want to overemphasize that everything is steel. You know, there is going to be a market for thermoplastic, particularly in the shallow water tiebacks. I mean, it is a cheaper product, a less expensive product. And we will probably get most of that kind of work.

So when these guys start tying back these small pods, with Subsea tiebacks to these under-utilized facilities -- particularly in the Gulf of Mexico, where you have just got a lot of hub-type facilities that are going to operate that way. While the market in the new construction is clearly going to the steel, I think that there is going to be a great kind of residual market in thermoplastic.

I think also in Asia, George, the Quest Offshore report shows that that is going to be a growing market. And it will be predominantly thermoplastic.

Just a follow-on on Subsea Products -- you have indicated in past conference calls that there would be lesser margin on steel than thermoplastic. And you came in here with 18.3 in the quarter for a gross margin. Can we expect that that is going to start to slide lower as the mix gets further into steel?

I don't think so, George. There is no question that the new products with steel are going to be a smaller margin for us relative to the cost of the sales component that is going into the revenue aspect. But I think we've got some productivity gains that are really going to offset some of that. And that is what I am expecting to happen.

At one of the things, George, I'll remind you what John said is -- we are incurring some moving expenses associated with the start up of the new plant in Panama City. So that -- (multiple speakers) complete in the third quarter, You may see a small impact on that. But I am not talking -- I am not modifying what John just said. I'm just elaborating that we also have some one-time expenses flowing through our Subsea Products gross margin line.

And that would hurt the -- that would hit the third quarter?

Third and fourth -- (multiple speakers)

Mostly third, and some carryover.

Let me reemphasize this, George -- (multiple speakers) is that we have made a huge effort to try to improve our product offering and be more efficient, be more market sensitive, and just do generally a better job. So on a trend line basis, without this one-time moving cost to Panama City -- in '05, for instance, I am expecting improved margins, even though we have got somewhat diluted margins as a result of the high cost of the steel as a cost of sales component.

Justin Kenter (ph).

Looking at the sequential decline in utilization for the ROV segment, which regional markets suffered the most significant sequential declines from Q2?

That is a nice question. I don't think I have that right in front of me. Let me -- have to get back with you with some details on that (multiple speakers) I apologize; I don't have it. (multiple speakers)

I think the -- I don't know. The sequential decline is -- as we said, we worked more days than we never had before. I mean, it is part of having more ROVs available --

We can normalize that. (multiple speakers) We can answer the question. We just don't have the data right now in front of us to do that. I mean, we have got the Stolt acquisition mixed into -- which is the first quarter that we have the complete Stolt acquisition. So it is a good question. And I'm sorry that we can't give you that information. (indiscernible) We will get it to you, though.

Okay, so are there any particular regions where you expect utilization to pick up going forward in the balance of the year?

Well, I think Angola is going to be a good market for us. We have got -- right now, the three largest markets for us are U.S., Norway, and Angola. And all of those are great places for us to work. The UK is not as good a place for us. Brazil -- we are moving up in market share down there. That will improve. And then just the rest of the world is kind of scattered -- we have got a great infrastructure for it. I mean, we really do have an outstanding franchise and ROV business.

And final question -- looking at margin performance in the balance of the year for that segment, do you expect it to be flattish or marginally higher?

To be flattish -- I mean, as the utilization improves, we might make a little margin improvement.

Mary Saffrey (ph).

You mentioned about acquisitions and that you're looking for additive acquisitions -- could you may be give us maybe more of an idea of what type of thing you might be wanting to fill in, or geographically to expand?

Excellent question. We are going to continue with the program that we started in '02, late '02. We think that probably the largest target for us are the specialty products that surround a tree, where we can make a fairly medium-sized type of acquisition that could add a product, or we could add a distribution channel through. We have taken quite a few looks at those.

We are in various stages of -- lots of different reviews of those type of acquisitions. We will continue to always be hanging around the basket -- what I call it is that we will never leave the rebound position on any ROV acquisition. We will continue to do that very limited number out there (ph). But anybody who wants to sell their vehicles -- Oceaneering will be -- clearly, they are probably the highest value opportunity.

Thirdly, I would say that there is some consolidation opportunities in the inspection business. We passed on a (sic) opportunity in the United States. We just looked at -- it is not quite as simple as it sounds. I want to be prepared to do a good job. The OIS acquisition has taken us longer to assimilate than I expected that it would. We are making some really excellent progress on that. So I would say that inspection opportunities will be one of the acquisitions that we look at.

Thanks. And also about your steel umbilicals, are you seeing any problem with steel prices? Are you passing those on? Or is it causing you any delays, or (multiple speakers) logistical problems?

No, not at all. It is a special alloy -- it is not that big of a -- in a worldwide scale, it is not -- we are not confronted with demand from China that is moving us out of the market, that sort of thing. (multiple speakers) And we are hedged into all that. All of our bids are hedged with firm commitments from our suppliers.

Tom Ascot (ph).

A couple of things -- based on your earnings guidance that you have offered, clearly it looks like the fourth quarter -- the December quarter looks like it should be roughly flat to up a little bit sequentially from September. And that looks like a change from the traditional Oceaneering -- the old model, where the Company would see a seasonal drop-off in the December period.

Is this because you have changed so much the character of the business that it's now a more stable and predictable revenue stream than used to be the case 2 and 3 years ago?

I think the only one -- we have 2 segments, Tom, that probably have some seasonality in them. And one of them is the projects business in the winter in the gulf, if we have any winter storms. And that would detract from the utilization there.

The second one tends to be the same winter seasonality in the North Sea, with the inspection business. Neither one of those are especially bad, but they are there. The offset is clearly going to be this product pick up. And I think we should end the year, sequentially, in the product segment, with improvement in the third quarter over the second, and the fourth quarter over the third.

And so that is really what makes this thing flat like it looks like it is. And that is really kind of the where this whole thing happens there. And I think our ROVs will be relatively flat. Who knows, there could be a pickup -- and that, and the seasonality in that is not quite as high.

I mean there is a little bit, again, associated with North Sea and Gulf of Mexico construction work. But the range is that -- like we have said before, that we are going to improve our marketing and our productivity and efficiency in making products. And I think we are on the way. I think we're seeing that happening.

So you are on pace to produce record earnings this year, so certainly can't be unhappy with that.

No, no, I am. But I am also happier that I think we really have found a way to improve our product business. And we have done a really good job of integrating products with our projects business in the Gulf of Mexico -- limiting the scope of that, staying within the boundary that we know, and hopefully not having any train wrecks there.

I like that. I like the idea that we are creating a lot of these sub-niche markets. That is why I went to a little explanation of the diving business. The diving business per se is not a good business. I mean, it's -- but if you pick out the right places, and places that we think we have some something to offer, or the high technical jobs.

But in order to keep divers around, we have got to have a baseline load, which we have chosen the inspection business to do. That inspection business feeds off our topside inspection business. So we have sort of a mud line to helideck approach to this thing.

We have got the largest database in the Gulf of Mexico. So anybody that changes properties is naturally going to be looking to us to give them some kind of condition report. So I think it's -- the whole thing is just kind of coming together that way.

That's what -- I feel best about that because, again, I am looking for record profits this year. I am looking for record profit next year. And hopefully, we will add some acquisitions that will give us record profits '06, '07, and '08.

We will mark that down in our model here.

Okay then. Hold me to it.

Another quick thing here; just a detail item -- I think you said you're going to charge off 1.3 million for the moving of the umbilicals plant to Florida over Q3 and Q4. If I do the math, that is just over 3 cents a share, net after tax, to do that. So I guess implicit in that -- if you put that 3 cents back in, the guidance would even be little bit better in Q3 in Q4, if it were not for the charge-off and the moving expenses. Did I get that right -- about 3 cents a share?

Yes, the math is there. And let me just sort of just think in terms of rolling that 3 cents into '05. I mean that is what we are expecting. We are expecting to roll that improvement for our products into '05. And we'll have behind us -- more and more of the problems we get behind us, the better off we are going to be.

And that is really where the improvement -- this 25 percent improvement in '05 is coming from. We can see that -- we are able to improve our earnings basically in flattish-type markets. And that, I think, says a lot for this niche market strategy that we have adopted.

Yes, with the Gulf of Mexico -- rig activity at a 20 year low, and you're boasting record earnings -- I mean, that says a lot about how you differentiated.

Exactly. I mean, that is what I was trying to say. You have got to get all the parts to get to fit together. You have got to control your activities. You have got to understand your markets. And I think we have got a lot of really capable people in the Company that are doing that. I mean I am very pleased with the people that we have.

(Operator Instructions). George Gaspar.

Coming back -- John, let's talk little bit about ROV area. How sustainable, going forward, is the margin relative to Q2? For reference, along the way, when you made the acquisition -- Stolt -- there was some implication that the margins were going to be less -- and correct me if I am wrong. And you had a very good margin in the quarter. How you see this going forward? Can you still grow this? Or on average could you see margins flatten and slip a bit from the 26.6?

I think flat is good performance. Slipping too much is not good performance. And I think that as we -- and part of the increase in utilization is not up to us, George. I mean, there is nothing we can do to induce people to use an ROV that don't need it. You remember, when I was in the drilling business, I used to say that there is no price low enough that makes somebody want to drill a well. This is a third derivative of that. There is no price low enough that would put them work and help us there.

But I feel pretty good about the business. I think that the equipment that we acquired from Stolt is good equipment. We acquired some good people to go with that. We have got a very strong market position in Angola now as a result of that. We have got an excellent market position in Norway as a result of that. We're building our position in Brazil. We expect to build our position in Mexico. We have got a fortress position in the Gulf of Mexico.

So -- and we have been able to convince the oil companies that the money that we spend to differentiate our services and give them additional reliability is compensatable to us in personnel increases. So again, it is just a one customer at a time, one rig operation at a time, one boat operation at a of time. And while I think -- I would predict flat, you always hope for a better performance.

I had a question on G&A. It came in higher than we were looking for post -- the first quarter being pretty much up there. What is the trend from here? Can you give us any the guidance on what we might be looking at into 3Q?

George, I will handle that one. I would think that the third corner will be flat with the second quarter. I think what we are realizing is that our organization is a little more complex with OIS as we go through that consolidation and with the Stolt and the new products. So I am saying that we can do a lower second half than the first half. But I think the third quarter is going to be flat with the second quarter.

Okay, and I question on your equity income -- John mentioned that the contribution was 2.5 million. Maybe it was just a range. But you are showing 2.32 million as your equity income. So that is less than 2.5 million for Medusa. Was there a minus in there somehow? Or can you explain --?

Sure. There is a minus in there, associated with our cable operations. It has -- you know, that is a joint venture. And it has -- because of the status of the cable business, we have not been able to get that one boat operation to break even. But John's statement of 2.5 million is correct from the contribution of the Medusa Spar.

And is this cabling -- this minus cable number -- do you expect that going forward into 3Q, 4Q -- or should it balance out at --

Absolutely. I don't think the cable market is going to improve. So I would model that consistently.

I got one question more, but I will stand aside.

(Operator Instructions). George Gaspar.

I have got to ask you about the MOPS area. The margin declined in the quarter -- it looked down in the 33 range -- 32.7 off of 35.5. And I would assume that that is as you are getting deeper into Medusa, or maybe -- correct me if I'm wrong. Has that got something to do with Medusa? And going forward, can we expect about that margin range -- high 33, 34 range?

Yes -- A, it has nothing to do with Medusa. And B -- it had to do with a specialty engineering job that we still do in the MOPS business that has lower margin. So it -- I don't think it is enough. When I look at the MOPS gross margin, and I see 4.5, 4.5, 4.4 million for the March quarter, the year-ago quarter, and the June quarter, I am not looking so much at the gross margin percentage. I am looking at the actual contribution. And I am calling that very flat.

So, Marvin, would you say that going forward, the revenue stream stays pretty flat versus the 13.1?

I would, for the margin contribution. But I mean, it is revenue. Since we are going to take that engineering job out of there, it would be going down.

Oh, okay.

Margin is going up (multiple speakers)

But the margin contribution as an amount is almost bankable a flat -- take an event to not make it be flat.

Okay, and then question on inspection -- considering what you guys have done, you know, you have done a great job here. I know John is saying that you have still got more integration work to do in picking up the momentum. But there -- the number on the gross income side in the second quarter was a surprise, and so was the revenue stream up from one 1Q.

Was there something special in there? Are we looking at a lower revenue stream in 3 and 4Q by a particular percentage that you may be able to relate? Or what is going on that is giving you the opportunity to improve your margin so much, because I can recall when we first started talking about this, you were kind of skeptical about your chances of moving forward on the margin side very quickly.

Again, George, I will handle that. I think on the revenue side, we did say that there is seasonality in the inspection business. Having said that, I would think that the first half and second half, there wouldn't be much difference, because the first quarter started out -- we had a really good increase in the second quarter. We see that flat to down in the third quarter. What is -- more importantly on the margin side, I think we are seeing an improvement in our margins because of what John mentioned. We are eliminating the smaller, less profitable jobs, and focusing on higher value-added services. So contribution-wise, at the operating income line, I see an improving -- flat to improving third quarter, and a better fourth-quarter than the first.

And question on ROV deployment -- John mentioned about some of the positives on your expansion in market share and penetration of international market. Is there a possibility, John, of now that you have -- you are building yourself into Angola, that this is going to give you an opportunity to move north into, let's say, Sadame (ph) or Nigeria offshore areas?

Yes, we are already there. I would say that without a doubt, we have the biggest market share in West Africa Deepwater work. That would include Nigeria, Gabon, Equatorial Guinea. It is not quite as big as it is in Angola, where it is virtually 100 percent. But it has got to be high, George. I don't know what is.

But I know -- the sophisticated rigs, as they move around the world, I think they're going to keep sophisticated equipment on them.

And John, you made reference to umbilical backlog -- from Quest, I believe it was? And those numbers sound pretty good. So the Subsea tree orders that have been generated in the first half -- kind of interesting to see that the West Coast or Africa/ Mediterranean represented 47 percent of the orders in the second quarter. And North America was -- the Gulf of Mexico was only 6. But going forward, they are projecting the Gulf of Mexico at 27 percent for the second half, which suggests that kind of parallels what you were saying about the potential improvement, giving you some market opportunity going into next year --?

Yes, that is why we have Florida. And that is the rationale for the plan in Panama City, Florida.

Okay. Well listen, thank you everybody, for joining the conference call today. We always appreciate your thoughts. And you have got great questions. And so rest assured that the money you have invested with this us being guarded well. Thank you very much.

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