Oceaneering International Inc (OII) 2004 Q3 法說會逐字稿

Good morning. My name is Tina and I will be conference facilitator today. At this time I would like to welcome everyone to Oceaneering International third quarter earnings release conference call.

[Operator Instructions]. Mr. Jack.

Good morning everybody .This is Jack Jurkoshek. I would like to thank you for joining us on the 2004 third-quarter earnings conference call. I would like to particularly welcome those who are participating in the web cast of this event, which is being made available to the company boardroom service of CCBN. Joining 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 Lumboya(ph), our Treasurer. This a reminder remarks we make 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. John? It's all yours.

Good morning. I like to thank you for joining the call. It is a pleasure to be with you today. Our record quarterly financial results were at the top end of our guidance range and above the consensus street expectations. Our earnings of $12.8 million were 18% higher than those of the second quarter. 42% better than the third quarter of 2003 and 8% above the previously quarterly recorded results reported in third quarter of 2002. It was particularly satisfying for our ROV operations to achieve an all time high profit performance for the second consecutive quarter. Sequentially ROV revenue and operating income improved due to a higher revenue in the US Gulf of Mexico all several West African countries particularly Angola.

Operating income during the quarter was up 13% over the second quarter. Year-over-year revenue improved about 40% and operating income increased nearly 55% attributable to the combined effects of an increase in market demand and international areas of operation and the beneficial impacts of the Stolt acquisition. To give you an update of our mix of business in the ROV segment, of our 160 systems available during quarter, a 133 worked. 100 in drill support and 33 in non-drill or 75 drill support, 25% non-drill support mix. This compares to 111 it worked a year ago when we had 125 vehicles of which 67% were drill support and 44 not drill support. So you can see our mix has changed a little bit, but these are snapshot positions and should not be misinterpreted to indicate any permanent mix in business.

Our average day rate for the quarter was about $5,600 per day on hire comparable to last quarter and up about $580 from the third quarter of last quarter. The 12% year-over-year day rate improvement is attributable to geographic and job mix related changes and our continuing ability to obtain rate increases. Our fleet utilization during the quarter was 69%, as compared to 67% last quarter and 71% a year ago. Year to date our fleet utilization has been 68%, about the same as 69% last year. (inaudible) utilization of 69% during the quarter , we established a new quarterly record for ROV day's work due to the increase in our fleet size as a result of the Stolt acquisition in the first-quarter.

Our ROV segment gives us significant leverage to the recovery currently under way in use of floating drilling rigs. On September 30, we acquired 10 more work class ROV's from Fugro increasing our industry leading market share position to an estimated 38%. We now have a 170 work class vehicles available in our fleet.

Our sub-sea product segment continued to show improving quarterly results year-over-year as we achieved increases in revenue, gross margin, and operating income due to our higher backlog this year as compared to 2003. Both Multiflex and OIE contributed to the improvement and results. Sequentially revenue was flat although gross margin and operating income declined. This was for the most part attributable to a drop in gross margin percentage on book or sales due to competitive pricing pressure in the market. Products backlog at the end of the quarter was $73 million, up 22% from the $60 million at the end of the second quarter. We believe our current backlog position will enable us to achieve a significant profit improvement from these operations on higher revenue with regard (inaudible) during the fourth quarter of this year as compared to the third quarter.

Overall our backlog is expected to generate a gross margin percentage comparable to what we just reported for this quarter in a range of15% to 16%. Our Panama City, Florida umbilical facility is on schedule to be operational in December.

Our Mobile off-shore production business had another very good quarter as all three 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 at least through the end of 2005. The earnings contribution from our Medusa (inaudible), which is being reported as equity income from unconsolidated affiliates was $2.2 million down from 2.5 million in the second quarter as the Spar was shut down in mid-September because of hurricane Ivan. The sixth Medusa well was put into production during the quarter.

Operations on this Spar were resumed in mid-October and the first sub-sea tieback well is spot Medusa north is expected to be in service some time during the first-quarter of next year. We're pleased with the results of our Medusa Spar investment and we remain optimistic about the future opportunities that it represents.

Our sub-sea project business, which is conducted only in the Gulf of Mexico continue to be competitive. The sequential increase in gross margin and operating income contribution were in line with what we anticipated. Year-over-year profit were unfavorable compared to 2003 as a consequence of lower market demand.

In our inspection groups, sequentially the decline in segment profit was due to generally lower revenue throughout the world with Africa been a notable exception. The percentage gross margin remained the same. Year-over-year revenue was flat overall although operating income declined on a reduced level of business in the Gulf of Mexico. This was due in part to three named tropical storms during the quarter.

Our advanced technologies non-oil field business had another very good quarter. in general this reflects a gradual improvement and results being achieved by our efforts over the last few years to secure additional work from the US Navy, which included the Nordacs acquisition in 2003. Sequentially quarterly financial performance improved on higher activity related largely to submarine repair work for the Navy. Year-over-year operating income was higher and the strength of increased space related product in service sales. The sequential decline in a year-over-year increase and unallocated expenses is attributable to changes in incentive plan expenses.

To summarize the quarter, given the market conditions that we have experienced, we are pleased that our third quarter was at the highest end of the earnings range that we had given to you. During the quarter, we benefited from increased interest income attributable to refunds from immediate US tax returns and Brazilian foreign currency gains as a result of the weaker US dollar. These positive impacts of non-operating income contributions were off set by the unexpected negative impact of hurricanes downtown (inaudible) Medusa Spar and disruption in the rest of our Gulf of Mexico ROV vessel diving inspection operation and negative effects of the Norwegian labor strikes in our Norway ROV operations.

Overall we believe our earnings performance has set us apart from many service companies involved in the offshore sector. During the third quarter each of our operating business segments contributed to our record quarterly results, which speaks well for our technical niche market strategy. I think that we've created an excellent business model and have executed our strategies very effectively. If you add depreciation and amortization back to our operating income we generated $35 million for the quarter. Our balance sheet remains in great shape. We had debt of 166 million and equity of $424 million. Our debt to cap percentage was 28%. During quarter we invested $36 million, 22 million on ROVs including $17 million for the Fugro acquisition and $7 million for our Multiples plant expansion. We have $185 million available for future borrowing under the revolving credit facility and are continuing to look for acquisitions with at least cost and capital returns. We intend to use our strong cash flows and balance sheet to further grow Oceaneering's earnings.

As a general overview of 2004, as we said in the press release we continue to estimate 2004 EPS of approximately $1.60. Earnings growth in 2004 of about 30% compared to 2003 appears to be well within our grasp. If we achieve $1.60 we will establish a new annual earnings record in excess of $41 million. For specific EPS fourth quarter guidance we are projecting earnings of $0.45 to $0.50 per share. This is predicated on sequential segment profit contribution increases from sub sea products on a higher level of umbilical sales and sub sea projects due to hurricane Ivan and related inspection and repair work as well as some improvement in earnings contributions from the Medusa Spar.

For the rest of our business operations we are anticipating sequential quarterly profit contributions somewhat flat to down. Our ROV operations are expected to experience lower international revenue due to a seasonal reduction for construction service work, the suspension of some drilling activity off West Africa as few rigs are been placed on dry dock for inspection and higher repair expenses, which is attributable to a larger number of ROV control umbilical to be replaced which we anticipate.

We expect a decline in revenue and profit from our inspection business due to the normal seasonality of the demand for such services particularly in Europe. Finally, our Antech business for the fourth quarter is expected to be down slightly from the record third quarter income due to the timing of work.

Looking ahead into 2005 we are estimating a range of earnings per share from $1.85 to $2.15 per share which is consistent with the preliminary $2 EPS number we established a year ago. We are staying with the $2 mid-range number with a plus or minus 7.5% range. Our earlier view appears to be on target as we do see improving markets in each our technical niches. The current range reflects the fact, we have improved market visibility for each segment heading into 2005. Our estimated 2005 EPS growth will be approximately 25% over 2004 is based on operating profit increases from our ROV sub-sea products, sub-sea projects, inspection segment and a rise in equity income contribution from the Medusa Spar.

Given the recent improvement in floating rig contract commitments for 2005 and our recent Fugro vehicle acquisition, we now expect the profit improvement from our ROV operations to be more than previously estimated. We see floating rig drilling activity overall in 2005 to be higher than we had envisioned particularly for rigs ready to drill in less than 3,000 feet of water. Our expected growth and profit contribution from this segment is the driving force in our overall increase in earnings for next year. The expected 2005 market for sub-sea products is compelling and we are projecting a significant increase in product revenue for 2005. While the absolute gross margin contribution is expected to improve near-term competitive pricing pressure for umbilicals is likely to cause the gross margin percentage umbilical sales to decrease slightly compared to 2004. The comparative pricing pressure we are experiencing in umbilicals is attributable to three reasons, two reason we had anticipated and a third we believe is temporary. The first is a lower manufacturing margin inherent and steel tube umbilicals due to the higher steel tube cost component in the finished product. The second is we are bidding larger value jobs for the strong purchasing power of our customers is even more pronounced. And the last reason may be the rumor one of our competitors is aggressively bidding work to create additional backlog in preparation for its evaluation of strategic alternatives.

Regardless of any pricing pressure we're confident our increased manufacturing capacity along with the anticipated increased in throughputs should enable us to earn more operating income in our product segment in 2005. The upside in our range will depend largely on how well we can drive margins towards a high end of the mid-teens. The really good news here is the sub-sea products should lead our profitability increase in 2006. In the sub-sea project area we anticipate starting off the year relatively strong due to a continuation of hurricane Ivan inspection and repair work. By mid year we expect to benefit from obtaining more production related RM work in the existing sub-sea infrastructure in the Gulf of Mexico.

In addition to the increased RM work we anticipate obtaining jobs using our sub-sea intervention lubricator system to do plug in amendments and live well wire line interventions on sub-sea wells in both deep and shallow water locations. This is the type of steady work we envisioned when we entered this market segment several years ago with our investments in the ocean interventions one and two. Remember our business model does not depend on an occurrence. Our sub-sea projects business has been profitable under a variety of market scenarios. We will certainly benefit from hurricane-related work although the main point is that we expect an increase in the non-storm repair activity in 2005 and 2006.

For inspection we see further improvements being obtained from our efforts to market higher value added services. Our goal is to improve the margins contribution from these segments by leveraging also our abilities to provide more comprehensive services. And finally our expectation for an improving equity income contribution from the Medusa Spar is based on current production estimates, which included tie (ph) back of the Medusa north to the Spur in the first quarter. We further believe that there is a trend for customers to invest their enormous cash flows in the off-shore and sub-sea style projects in our 2006 earnings will be even better than 2005. At this time we think that there is a reasonable chance for an additional 20% growth. Our assessment is underpinned by the expectations hydrocarbon commodity price declines will not break below the $30 level. I would like to just sort of summarize our current status.

Our results for the third quarter demonstrate our ability to generate excellent earnings was to ahead for an all time record year. Our cash flow is strong and our ability to invest money wisely apparent. Given 2001 to 2004, which includes a wide range of market conditions will be the best four years in Oceaneering's history. It is clear our claimant coverage market business strategy is working very well. We have operating leverage to take advantage of the up turn in deep water drilling and Sub-sea completion activity, which is currently taking place. We believe 2004 will be our best year-to-date with 2005 even better and 2006 better yet. I appreciate everyone joining the conference this morning and I would like to open it up to any comments or questions you might have.

[Operator Instructions] Your first question comes from Ian McCristen (ph)

Good morning.

Good morning.

We recently seen some nice improvement in the North Sea with decent visibility on drilling demand even through the winter. How do you view this market currently and does that factor into your or else the acquisition strategy moving into 2005 at all?

I think so. We see the U.K. side coming back some and clearly we're already a dominant player in Norway. We think that that will continue strong and, you know, we're positive on the North Sea.

Any further color you can provide on your acquisition strategy next year?

Well, we just keep on looking around. That's what you gotta do. In the American colleges hanging around the backboard and see which way the ball bounces around for you.

Q2 over Q1, we saw a slight dip in utilizations in the R.O.V. after the Stolt acquisition, is that likely to occur again in Q4 with your 10 new additions or do you think that the 69% to 70% level is probably sustainable?

It may go down a just a little bit. I mean is we said in our prepared remarks, we anticipated a decrease from the record levels that we achieved in the second and third quarter. You know some of the rigs in West Africa are going to do some refits(ph) such a longer term projects been taking care of in and generally during those we don't get any right during the standby turn.

So expected return, I guess in Q-1. I get last question on the R.O.V. What is the day rate differential between the Gulf and West Africa North Sea other markets?

If I told you that I would tell you something that I would have to kill you afterwards. I'm sorry.

OK. I will abandon that line of questioning just lastly, moving to AdTech which is the second quarter where you described a nice sequential update attributed to work with the Navy, is there a significant amount of submarine repair work remaining or is there a sort of long-term contracting available here or is that something that will kind of dwindle away and we might see normalized profits back sort of when they were at the beginning of the year?

That's a great question. I'm bullish on that. Oceaneering is one of three companies in the U.S. that is permitted or certificated to actually weld and do mechanical work on nuclear navy submarines. Our two competitors are very, very large corporations and we have a certain nimbleness in that market that you know, we're continuing to get, you know, nice rector fit jobs. There is a lot of activity surrounding the nuclear submarine fleet. There is a lot of talk about refurbishment's and a lot of things into the future. These are sort of longer terms, but in terms of what they are going to do with a ballistic submarine-type vessels and how that's going to turn out. Some of those jobs will obviously be bigger than things that we can do. But I think the market that we have developed with the Department of Defense US Navy is excellent. It's based on some technology that we developed. I think that it's. -- and we're a small player. This is not like sorting weapons systems. You know that could be cancelled, I mean this is a just a growing, improving market force.

We did say that we expected it to be down in the fourth quarter due to timing of projects.

There is a lot of timing. I would hate to predict anything in the world that has a steady growth. I guess that's really part of the reason that have I been so proud of what we've done from 2001 through at least the third quarter of this year. We've had some, you know, with the exception of 03, we've had continuing, steady improvement in a variety of market conditions. So we're making a lot of progress toward, you know, toward getting our business model as to a little bit steadier than some of the rest of them that have to have an occurrence currently. 10 years ago Oceaneering was one of the major beneficiaries of Hurricane Andrew. You know, we decided 10 years ago we didn't want to wait around for a hurricane in the Gulf of Mexico every 10 years, so that's why we've got the business model that we have.

OK sounds good. Thank you guys.

Thank you.

Your next question comes from Tom Ascot.

Good morning, fellows. Two things. One the R.O.V. margin sequentially in the quarter from June to September, you know, revenue goes up 1.5 and operating profit goes up a 1.7 million, so clearly I mean, huge increases in profitability. Can you help us understand, where there are unusual items in there or some synergy savings as a result of the additional equipment or what happened to help that do that and, of course, this question is intended to find out, you know how sustainable this is or what can we look for on a go-forward basis?

Great question. I would caution anybody to model in 29% or 30% margins force. Third quarter we were lucky, we didn't have any umbilical replacements and that's just a key element and that's a very expensive R&M item that we have it is almost unheard of that at 170 vessel fleet, vehicle fleet that you would not have at least a few of those happen to you, so that I don't think that 29 or 30 is sustainable. You know what we did say in the mid-20's. I can see that trending upward into the higher 20's and I think that we are, a you suggested, incurring some synergies between equipment now. We're starting to standardize some of the packages that's we got from store to lower those expenses. I guess the big thing here is also that, you know one of the things that you learn from being in the drilling business is that when utilization goes up rates go up with them. So while we don't have a huge level to the rate increase and I did in my prepared remarks did say that, we got a 12% increase in revenue, average revenue per day in the last 365 days. That's a good job. It's not like a drilling contract where you get 20% in a month. But for us it's fantastic. So the bet next year is that we are going to have some improved utilization. I expect to have additional price increases. We will continue to have economies of operating scale. I just -- I would caution you not to model 29%.

And my second question. It's not directly related to that, but a couple of non-operating items in the quarter, the additional interest income. We know where that falls in the P&L but the second item, the currency gains, how much was that dollar amount and what line item was that in? Was that a reduction in your G&A?

That was in other income.

How much was that currency number?

Few hundred thousand dollars.

Few hundred thousand dollars. Not a whole lot.

Right

I just pointed out one was really the take home value that we're trying to show you there is that this is a pretty pure $0.50. I mean it is a very pure $0.50. I mean you've you know, some positives offset by negative occurrences, so, you know, I think that it is a good performance.

The medusa shut-in was the negative occurrence and the interest income and a little bit of currency gains was favorable.

But I do I hope environment continues to mend the tax returns. If there is any money out there, I don't think given the current tax status in the U.S. that we need to give anymore of it away.

Yes I think it's showing how to do that, I would appreciate it. One outstanding item and that is the G&A number is the lowest G&A in over a year. That was kept coming down. I mean how did do you that? Last time you read this somehow.

You're correct. I think that -- we've got some factors that are really kind of working against us in that part. We're in the same situation that everybody else is on Sarbanes 404. We have also embarked on an enterprise resource planning system. We're switching to a new computer system with a lot of operating data in it so we have some costs that -- that may have impacted, you know, some of the prior quarters. I'm -- I'm, frankly, a little surprised. We're doing a good job on the communication costs, Tom, we have a lot of that under control that we didn't have. People wise we don't have a lot of people. The restrictive stock curve, you know is starting to come down for us. Is this the variety of factors, I think that we will have some more expenses in fourth quarter but there is nothing unusual in the third quarter G&A line? There is no credit, this is no one-time occurrences or like that or anything like that. I think that it is cost control and John's caution statements is that in this regulatory world that we're trying to increase and improve our information systems it's -- it takes a lot of effort to control those costs and this quarter kind of starts in line that we were successful, so we are not going to bet on that happening every quarter.

OK. Thank you, fellows.

Thanks

Your next question from Martin Malloy .

Congratulations on the quarter. I just wondered if you might be able to tell us little bit more about what's going on the inspection side?

Yes, very specific, I guess probably the biggest disappointment for me on the inspection side is that we didn't take the cost out of the O.I.S. acquisition that we made last year as quickly as I expected for us to. Now, what we have done, was the major things that we done is we relocated the worldwide inspection headquarters from Aberdeen to Dubai. What I think that's going to do force is that's going to lower our labor costs, that come into, a kind of sharpen our focus on margins a little bit from the cost perspective. I think that we have a great opportunity here to, you know, add some components to these inspections. It's kind of a, you know, a McDonald's version of, you know, would you like to add computer software to that inspection report? Would you like for us to put it in different data files for you? So I have good hopes for that. It's a common area that I've considered. Is this a roll up opportunity for us? We have to get a little bit better at doing that before I'm willing to just embark on a -- on a roll up strategy for inspection. Right now I think that my strategy is more focused on adding technology to the services as opposed to justices doing roll ups.

And in terms of 2005 guidance, previously I think that you talked about roughly $2 a share in EPS for next year and then you put out a range that this time a $1.85 to $2.15. Is there anything that changed that made you a little more hesitant to focus on that $2 number?

No, I think that we just had things kind of backwards to be very candid with you and that is if we were given ranges in our quarters, but we won't given ranges for a year and just, you know some people asked me about that and -- and so I said, well, what I had intended to do was in my view this $2 mid-point, I mean people tend to go towards the mid point as a guidance and let's say how, you know they sense you have a bias of being conservative or being too liberal. And so what I had at least in my mind it is established was a sort of a plus or minus 10% range and maybe I did this too subtlety and that's why the -- my view I've in their-year-old the range, you know, to $1.85 to $2.15. As long as you guys and ladies stay inside that range, I'm pretty happy. The down side reflects, you know, pricing pressure, margin pressure in our products group. The up -- the fact that we kept the mid point at exactly the same place reflects the fact that we have overcome whatever lesser expectation that we have at least in the first half of 2005 with improved expectation from our oral B group which is sort of driving at now is just indicative to me that one niche can be a little down and another one can be a little bit up and overall, you know, we have a pretty good business model. You know, you can go to the high end of the range if you assume that the products margins improved. I mean, if you go back to 2002 and you look at the margins that we produced in products you got to say, hey, this is a business that can be, you know, a real driving force in the company's earnings.

Thank you.

[Operator Instructions]. Your next question comes from George Gaspar.

Yes, good morning. Congratulations. Great quarter. First question, John, is on the Medusa tieback well, is Oceaneering, I apologize if these questions have been asked, I got knocked off right at the begging of the question and answer. Is OII generating any business on that tieback project?

Absolutely.

All right. And then if you could give us a little bit more color here on the future view of the sub-sea products area umbilical business. If you could relate the current backlog mix plastic to steel and how you view, are there any changes that you're seeing in the market going forward? Is this going to percentage wise, do you see it moving x percent to steel versus plastic? When is that going to happen and, you know, how would you view your backlog being going into 2005, calendar 2005 on a steel versus plastic basis?

OK. That's a great question, George. Let's see if I can capture the flavor of it. The point that I made in the prepared remarks was that the backlog that we have should give us the same kind of margins that we saw in Q3. We'll have a pickup in revenue in the segment in Q4 and therefore we're going to get a higher profit contribution in Q4 from products. I'm going to just say my expectation is that our backlog going into 2005 will be similar to what it was going into 2004, 2004 we went in with a $47 million backlog. So we are going to work off of some of the $73 million that we have.

Now there are some important jobs that we're looking at particularly for the Panama City facility that are steel tube and we're reviewing the sensitivity of utilization of that plant versus profitability of specific jobs, so I would expect the important jobs there to probably be awarded after the first of the year. If they don't get awarded early in December, you know, you have the holidays, you have things that will get in the way and I don't think 30 days will matter it the customers very much. So I will say that our mix of steel tube and thermal plastic will be slightly bias toward steel tube backlog therefore a little less margin going into the year than we had in the same backlog next year.

That may be hard to cut, I mean, I don't want to get it too far down because we are starting to introduce new products into the mix. I mean, Umbilical is still the dominant product that we have though, but we now have the specialty valve product and there are some large valve orders out there particularly for some floating production systems that we're chasing. There's a lot of control valves for the tree manufacturers that we're chasing. And then there is a -- you know, the sub product line that we have that surrounds Oceaneering invention engineering products. I'm a little down on umbilicals right now, but over time I'm still -- I believe that we have an excellent position in the marketplace and hopefully, you know, the downward price pressure that we have now is more related to an Aberration than it is to any structural change in the market. I do not believe that there is any significant over capacity. I mean, I think that the capacity that we're adding is not a big issue for the marketplace. I think that we will -- we will absorb the additional orders that the market will have in 2005, 2006, 2007.

So definitely John, in looking at modeling into next year on this particular segment, got to be looking down from the average of this year and the last couple of years.

Well, I think you probably look up from 2003. 2003 was abysmal. We did a pitiful job of operating that segment. '02 was probably a higher margin than we have seen in some time. I don't want to get everybody hysterical about margins and products. I don't think that we're talking about a crash and the margins that we have in 2004, I mean, the range that I said were mid-teens. What I was hoping for and, frankly, if we hadn't had what I think is an aberration I think that we would have had high teens. But if you model 14% to 15%, you won't miss this thing much.

One additional on the Umbilical business. Do you have anything to tell us about what happened in the Gulf of Mexico? Hurricane Ivan? Did the industry learn anything about the differential between using thermal plastic and steel and considering the floor condition of the Gulf and some of the pipeline breaks, anything come out of that from your perspective as to how the industry may approach installation of Umbilicals in the future?

The answer is no. I mean I will give one data point that surprised me in over 30 years of being in this business, 35 years, I was shocked to find, you know, one of the platforms that was in 450 feet of water that was sheered off in a mud slide is now in or would have been in 450 feet of waters, we've always had mud slides out there. It seems that the storm coming in the on the eastern side of the river the way it did which is a lot of deep-water activity out there in that Mississippi canyon area, it churned up some forces at the bottom of 2,000, 3,000 feet, you know that were really significant. I think that it might have implications for some pipeline design. It may have some issues there. I'm not sure if that reason that's there would be burial attempts. I'm not quite as up on that as I probably need to be. You know, that was one of the problems with the infrastructure were the pipeline repairs. That was one of the big bottlenecks in the Gulf that kept it from getting on-line.

OK thank you.

No impact on umbilical though ?

No. You get a 50 foot mud slide there isn't anything you can do to hold that umbilical in place.

Right. OK thank you.

Next question comes from Joe Aggeler.

Good morning. Quick question on CapEx in the quarter did the acquisition, you know, fall into the third quarter CapEx

Yes.

That was $16.5 million of the 36.5 right?

Yes.

And what was the other 20 sort of allocated? How much of that, might have been the Panama City facility?

7 was Panama City.

OK.

22 million total was in ROVs including the 17 million on Huber (ph) .

OK, And, Marvin, do you have a cash number at the end of the quarter?, I don't know, I didn't see that in the release. If it's there, I apologize.

Let me look. - I'll tell you what we are going to have on the queue, which is going to be filed, it is $26 million.

OK, do you have any guidance in terms of CapEx going forward, fourth quarter in 2005, at this point?

I will tell you Joe, that's a $64 million question. I don't see, you know a lot of internal organic type CapEx. It's gonna be in the area of acquisitions, things -- .

Right we are just going to wrap-up the Panama City, plant in the fourth quarter and then the -- rest is going to be more -- impacted by acquisitions opportunities in the normal, I would put in $20 million this is kind of regular stuff. But don't even know where that's going to come from. We have very low maintenance CapEx as you know.

Right. So you're saying if next year (inaudible) if we give you little bit more than $20 million, you know some where number like 30 million, 35 million in CapEx, at least what I am showing without any major working capital changes, you guys could be throwing off something like $75 to $80 million in free cash flow next year?

That's consistent, with what we believe, yes.

And I imagine that, you know, without any acquisitions it would be -- applied towards debt reduction?

That's, Correct.

Just a general question. I know -- I think you have touched on this earlier John. I apologize if I missed it, but. Have you gotten any, you know, concern over ROVs with respect to drill support yet? I mean is the market - you know given the activation of some idle rigs is taking place. (inaudible) What is the drill support market, for R.O.V's look like?

We're bullish on that Joe. You know, we see the -- a driving force in our earnings improvement in 2005 coming from the R.O.V. and a lot of that is coming from these rigs that are drilling less than 3,000 feet of water. There has been a nice, surprising improvement in that, and I think it portends, as I said in the prepared remarks, (inaudible) I think that the big customers, the large independence, and the integrated oil companies, you know, we're starting to realize that there is a limit to buying back the stock, and Russia is still an appealing place for CapEx, but, you know there is a lot of oil in the ground, particularly in --along the Atlantic ridges, and the deep water Gulf of Mexico. So I think that there will be new entrances, and interest companies going into that.

I guess my question is more, is there any concern over R.O.V. availability, as a market, you know?

No.

OK.

Our utilization is below 70%. We can ramp it up quickly and that's why I, frankly, -- we've concentrated on buying equipment, as opposed to overbuilding the market.

What about people, though on that side, I mean?

That's a concern. I mean, that's an excellent point. Oceaneering is, -- as far as I know at least, we're the only company that trains our people internally, we have 11 R.O.V. simulators located all around the world. We are spending a lot of money on recruiting (inaudible), US R.O.V personnel, particularly in West Africa, South Africa, Asia. Our R.O.V. personnel pool in Brazil has turned out to being a very significant benefit to us, in order to manage systems, there is a threat at least, in my mind that as the rig compliment goes back, they'll pull some of our people with higher wages, and so forth. So there is an inflationary pull on that and -- we're training people as quickly as we can.

You have the people in place to, you know, put how many ROVS out on the market now?

We have people to put, you know, probably 80% of our equipment out.

Ok. So you can go from 70% to 80% utilization with no issues?

Let me - because, hopefully some of our employees will listen to this as well, and they will be pulling their hair out. Because there is - each assignment in the -- and the drilling assignments are generally easier than the construction assignments where you have more people and you have a lot more tooling, and lot more interfacing with the engineering group and so forth. So it depends a lot on the mix. If it's a -- 2,500 foot water depth well -- that the R.O.V. is pretty set for, you know -- we are in pretty good shape on that

OK, Great.

-- We don't have those extra people on the payroll, that we'll just put to work, but I mean, those people, we believe, are available and assessable into - to put these systems to work.

OK, that makes sense. Thanks.

Your next question comes from Peter Hondo (ph).

Great quarter guys, I had two questions. One is just on the product segment again. Can you talk a little bit about what actually is happening with that aggressive competitor, because it looks like -- I mean, obviously your backlog rose sequentially pretty meaningfully, yet you're saying that this competitor is being pretty price -you know aggressive on pricing. So are they not winning these orders, and you're meeting them on price? Can you talk a little bit about what is happening there. And then I have a follow-up question.

Let's see if I can give you flavor for it. Again, let me -- I don't want to dwell on this. I think that there is pricing pressure, they are winning some work, at lower prices (inaudible) and -- than we were willing to look at, and its really is a utilization balance for us. I mean how much volume we want to go out at whatever kind of a margin that we want to have. And so, you know, I mean, I'm not obsessed by it. I hope I didn't come across as being overly concerned or you know blaming anybody. Certainly, I don't blame anybody. Competitive market, and this is the way the world works.

Thanks, no not at all, actually you would think that your backlog would have stayed flat or not risen as dramatically as it has, if your competitor is taking...

Well some of that, there's a certain lumpiness to these orders. I mean particularly now that we're bidding longer offsets, bigger projects, you know, it's not -- it won't be unusual for us to, you know, book a big order that, you know, is due nine months out or six months, seven months out so.

And the delay between the time the order is bid and awarded is -- is considerable. So the one that's are current issue concern is current bidding activity as opposed to the current awards that were made during the third quarter that allowed our backlog.

Thank you Marvin, that's a great point is that you know what we're trying to do is anticipate here and that's a big point. I mean one of the key indicators for me is when the customers begin to see further out deliverance, and we have been clearly further down the line than the tree manufacturers are in the order sequence and that means that we've had earlier deliveries and once our deliveries start to lengthen out my sense is that price willing improve.

Right, right. Can you talk about the utilization of your umbilical plans? What is the capacity now? What is the capacity when Panama -- you know when the Florida plan comes on-line and what is that utilization right now?

Well, that's a great question, we have work in all of our plants right now and I haven't released that information by a plant because two reasons. One, there is obviously competitive reasons and secondly, we want our new guy in charge of the products group, and we want him to think in terms of overall utilization of capacity as opposed to capacity as one single profit center. That was the model that we had used for several years and we tried to change that model. We weren't able to, we now have, you know, new management in that group and we see overall utilization and not just utilization per plant. So that's where we're headed in that, but we do have work in each plant. And I apologize that I can't give you any more specificity than that.

Other than we have significant capacity that can be put to use especially with Panama City Company.

Yes, we have a lot of capacity.

No means of capacity constraint.

And I apologize. One follow-up. I guess it follows a question that was asked earlier about just uses of free cash. If you don't find any really good acquisitions, why not buy back some of your stock? What is your philosophy on that?

We will do that, we will do that. We have done that in the past. We will continue to do that. Our preference is to, you know, let's take a look, let's don't be, you know, let's don't rush into it, I mean, I think, you know just being patient hanging around the back board, I know that is a corny analogy for people, but it's really what I believe -- and if we can't-- find you know any accretive acquisitions or things that yield adequate return on capital, that's exactly what we are going to do.

I just like to say that you guys run a great operation you show good returns and great free cash, so, I mean, you know, the stock is cheap and so we're glad to hear that you're considering buying back stock.

Thank you. OK, well listen, I appreciate everybody attending our call. I know that a lot of you were glued to the television for the latest news. I will not update you on that. And wish you a lot of luck and have a nice Thanksgiving holiday in the next few weeks. Thank you for joining our third quarter conference call. Bye, bye.