Oceaneering International Inc (OII) 2004 Q4 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference facilitator today. At this time, I would like to welcome everyone to Oceaneering International fourth-quarter and year-end 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) Mr. Huff, you may begin your conference.

Good morning, everybody. This is Jack Jurkoshek. I would like to thank you for joining us on our 2004 fourth-quarter earnings conference call. I would like to particularly welcome those of you who may be participating in the webcast of this event, which is being made available through the Company Boardroom service offered by Thompson CCBN.

Joining me this morning is John Huff, our Chairman and Chief Executive Officer, who is going to be leading the call; Marvin Migura, our Chief Financial Officer; and Bob McGoya, (ph) our Treasurer. 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 forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. I am now going to turn the call over to John.

Good morning. Thank you for joining the call. It is a pleasure to be with you today. Our fourth-quarter net income of $11.6 million was a record high, 30 percent more than the previous record set in 2002, and 90 percent higher than the fourth quarter of 2003. Year-over-year, our $5.6 million improvement in earnings was achieved on higher operating income from 5 of our 6 business segments and an increase in equity income from the Medusa Spar. I believe this speaks very well for the technical niche services and products offerings we provide.

As we mentioned in the press release, the fourth-quarter results included $1.9 million of pre-tax charges related to write-downs of our investment in the subsea telecommunications cable services joint venture. Our guidance had not anticipated this non-cash charge. Likewise, the fourth quarter included an adjustment in our 2004 effective income tax rate from 35 to 34 percent; and using the actual tax rate for the year caused the effective tax rate for the fourth quarter to be 31 percent or $700,000 less than what it would have been otherwise.

Neither of these items was included in our earlier guidance. If you were to adjust for these two items, our reported EPS would've been at the midpoint of the range.

I want to spend a few minutes talking about our operations and our outlook, and then turn the call over to you for question so I may more specifically address your needs. As I mentioned in the press release, we were very pleased with results of the quarter and with 2004 overall. More importantly at this point in time, we were looking forward to 2005 and 2006. However, before I move onto our outlook for 2005, I would like to review our 2004 year. First I will briefly review the highlights of the fourth quarter and then summarize the year.

ROVs achieved record results for the third consecutive quarter due to the benefit of the Fugro vehicle acquisition in late September and on higher demand for our services in the Gulf of Mexico, Africa, and Norway. Subsea Products operating income was the highest it has been in the past 2 years; and we booked nearly $59 million in new orders, more than any other quarter in over 3 years. This enabled us to increase our products backlog to $78 million at year-end, up from 75 million at the end of the third quarter and up from 47 million at the beginning of the year. Our products backlog is now higher than it has been since the middle of 2001.

Our Subsea Projects segment contributed over $3 million in operating income during the quarter, its best quarterly performance in 2 years. This was accomplished on increased demand for our manned diving and vessel-based project inspection and repair services due to Hurricane Ivan and miscellaneous subsea infrastructure work.

Finally our SG&A expenses picked up in the fourth quarter due largely to expenses associated with running our larger Subsea Products business, moving our Eastern region administrative office from Aberdeen to Dubai, and higher corporate legal costs with the closing out of a variety of issues. As a percentage of revenue, these costs were 9 percent, up 8 percent from the third quarter, although the same as a yearly average in both 2004 and 2003.

That being said, we do not anticipate this run rate to continue into 2005. While we will be diligently controlling all of our costs, it is costing us more to run our business. We expect more like an average of $18 million a quarter in 2005.

For the year 2004, we achieved the highest earnings in the Company's history, slightly better than our prior record year in 2002, when we benefited from a 29 percent tax rate, and 38 percent better than last year. Our fourth-quarter results, the $11 million year-over-year improvement in net income, was broadbased, with 4 of our 6 business segments and equity income from the Medusa Spar contributing to the increase.

Our ROV segment, including the Stolt and Fugro fleet acquisitions we completed in February and September, achieved record profit contribution even at a modest 70 percent fleet utilization rate. Our operating income per day on hire of approximately $1,200 surpassed the previous record set in 2001.

Our MOPS business achieved a record pre-tax profit contribution, as our late 2003 investment in the Medusa Spar resulted in over $8 million of equity income.

Subsea Products operating income more than doubled. Our year-end backlog of $78 million was up 65 percent from the beginning of the year.

ADTECH accomplished record operating income from our efforts over the past several years to secure additional work for the U.S. Navy, particularly submarine related projects; and NASA, particularly in the return to flight of the space shuttle and completion of the international space station.

During the year we invested over $150 million, including 88 million to modernize and increase the size of our ROV fleet and $38 million to expand our umbilical manufacturing capabilities. These capital investments have the potential to significantly benefit Oceaneering's future financial performance.

The ROV investment enabled us to increase our fleet size from 125 to 170 vehicles and our leading worldwide market share position from 28 percent to 38 percent. We are now the number 1 supplier of ROV drill support services in the Gulf of Mexico, Norway, West Africa, Mexico, and Canada. We are the number 2 supplier in Brazil, 1 vehicle short of the leader.

Our investment in umbilical manufacturing capacity now puts us in a better position than the other 3 large manufacturers to make steel tube based product. We added a steel tube cabling machine to our Brazil plant in April, and in December opened a new U.S. plant featuring the world's largest steel tube manufacturing equipment. Based on data from Quest Offshore, market demand for umbilicals in 2004 increased by over 30 percent over 2003 to slightly over 1,500 kilometers, second only to the record of slightly less than 1,700 kilometers ordered in 2001.

Our overall market ranking for awards was a respectable number 2 with 21 percent of the market, mostly due to the fact we secured over half of the thermoplastic umbilical orders. Our market ranking on orders received for steel tube based product, which constituted 80 percent of the total 2004 market demand, was fourth, with only 13 percent market share. This was a consequence of not having the capacity to compete in the steel tube market early in the year. We anticipate doing much better in a slightly improving market over the next few years.

In summary, we believe our record annual 2004 earnings performance has set us apart from many companies involved in the offshore sector. We achieved increased profit contributions from 4 of our 6 business operations and set records in 3 of them. Our focus on providing products and services for deepwater and subsea completions is a good way to play the entire offshore lifecycle from exploration through production. Offshore and especially deepwater is definitely one of the best frontiers for the industry to lower its finding and development costs.

When you compare us to larger diversified services and products companies, we do extremely well on virtually every financial metrics, except for having modest valuation multiples for earnings per share and cash flow per share. All in all, I think we have created an excellent business model and have executed our strategies very confidently.

If you add depreciation back to our operating income we generated a record $130 million in cash flow this year, 17 percent more than last year. Our balance sheet is in excellent condition. At year end we had debt of $142 million and equity of 454 million. Our debt to cap percentage was 24 percent. We have $209 million available for future borrowings under our revolving credit facility, and are continuing to look for accretive acquisitions with at least cost of capital returns. We intend to use our strong cash flows and balance sheet to further grow Oceaneering's earnings.

Now on to 2005. As we said in the press release we expect to achieve new earnings per share record in 2005 and are estimating 2005 EPS of $1.85 to $2.15, including the impact of expensing stock options commencing in the third quarter. Stock option expense in 2005 based on existing options is projected to impact our earnings by about $1.2 million pre-tax, spread over the third and fourth quarters.

Our 2005 EPS estimate is based on achieving an improvement in profit contribution from each of our oilfield business activities led by the rise in ROV profitability. Best-ever earnings contributions from our ROV, MOPS, and inspection businesses are expected. To achieve EPS of $2, the midpoint of our guidance range, we estimate we will have to generate $17.5 million more pre-tax income than in 2004.

We envision this occurring as follows. 3.7 will be achieved by eliminating the charge we took in '04 to terminate the Subsea 7 acquisition effort and the subsea telecommunications service joint venture write-downs. Increasing the utilization of our ROV fleet to the 75 to 78 percent range will generate 8 to $10 million. This estimate is based on having an average of 170 vehicles during the year, up from 157 in 2004, and maintaining the $1,200 per day of operating income on hire achieved last year. We expect to realize about $2 dollars from increased equity income from the Medusa Spar based on recent production estimates. About 5.5 to $7.5 million is anticipated to come from the remainder of our oilfield business segments, Subsea Products, inspection, and Subsea Projects.

Subtracting from the above improvements in operations, we expect to incur more SG&A expenses in 2005. The cost of compliance with new regulations worldwide is increasing our cost of doing business. In addition, we are implementing a new software enterprise system during 2005 to help us run our business more effectively in 2006 and beyond. However, in the meantime we must incur the initial costs of training and implementation.

We believe this is a very doable plan with a downside and upside to our $2 midpoint estimate, as we currently see it, coming primarily from the performance of Subsea Products, particularly our umbilical business later in the year. The profit contribution from our ROV segment is expected to improve as we increase our fleet utilization by providing drill support services on board an increasing number of floating drilling rigs. A substantial general market demand increase for 2005-2006 use of floating drilling rigs is currently underway; and we are extremely well positioned to participate in this market growth.

We continue to believe in the strong market prospects for our products business segment driven by a continuation of a high-level of subsea completion activity. Consequently, we expect the operating profit contribution of our Subsea Projects segment to improve due to higher Multiflex sales and a general sales increase in each of OIE's product service lines.

Market demand for umbilicals in 2005 based on Quest Offshore's forecast is expected to be over 2,400 kilometers, up 60 percent from the 1,500 kilometers this year. This is based primarily on an anticipated increase in thermoplastic product demand to a little over 1,100 kilometers from a little less than 300 kilometers in 2004, driven by several large pending contract awards by Petrobras. We are well positioned to a significant piece of this work, which we anticipate will have delivery dates extending out into 2006 and beyond.

Market demand for steel tube based product is expected to be slightly better than 2004's 1,200 kilometers, which was a record high. Market demand in the Gulf of Mexico, however, is expected to double to the 600 kilometer level, which portends well for our new plant in Florida. That being said, the competitive pricing environment for umbilicals in the U.S., which addressed at our last conference call, still persist. We remain confident our increased manufacturing capacity, along with the anticipated increase in throughput, should enable us to earn more operating income from our domestic umbilical operations late 2005 and during 2006.

MOPS pre-tax income contribution is expected to grow as a result of an increase in equity income from the Medusa Spar. This is anticipated based on a full-year production from the initial 6 Medusa well field and the announced tieback of Medusa North.

Subsea Projects' financial performance is expected to be higher on the strength of growth in single well tie-back projects and an escalation in deepwater infrastructure inspection, repair, and maintenance activities. Inspection profitability is expected to improve by marketing higher value-added services, particularly those related to planning and performing preventative maintenance to production facilities and pipeline inspections.

In summary, given the general 2005 market outlook for oilfield services, we like our position. Our earnings growth in 2005 of 25 percent appears to be well within our grasp. When you consider this 25 percent increase is on top of our record 2004 results, we believe it is a sign of a Company that can deliver consistently better results year after year.

Furthermore, we are positioned to achieve additional upside earnings contributions from, 1, a better market than we have allowed for, which would enable us to use our existing extra capacity and operating leverage. At some point $30-plus oil and $6 gas must have a positive impact on our customer spending. 2, further acquisitions or stock repurchases. To date we have not considered implementing a dividend program or declaring a special onetime dividend. Our intent is to grow the Company's profitability by making sound investments. When we define such opportunities we will consider buying back our shares in the open market.

Presuming we make $2 EPS this year, we anticipate generating over $80 million of cash after maintenance CapEx of $25 million and growth in working capital to fund these initiatives. In addition, we have substantial borrowing capacity under our existing credit facilities.

Looking further ahead we believe there is a trend for our customers to invest their enormous cash flows in offshore and subsea style projects; and consequently our 2006 earnings will be even better than 2005. At this time, we think there is a reasonable chance for an additional 20 percent growth led by an increase in Subsea Product profit contribution. Market demand for steel tube umbilicals in 2006 is expected to grow to over 1,800 kilometers, more than 500 kilometers or 40 percent more than this year, in 2005. Our assessment is underpinned by the expectation that hydrocarbon commodity price declines will not break the $30 level.

For specific quarter 1 guidance, we're projecting earnings in the range of 30 to 40 cents for the first quarter, considerably more than we reported in the first quarter 2004, but sequentially lower than the quarter we just reported. Simply stated, the sequential decline in first-quarter earnings from the fourth quarter of 2004 is expected to come primarily from lower profit contributions from Subsea Projects' segment and seasonal variances.

The following is a segment by segment review of our first quarter outlook. ROVs; we expect the quarterly profit contributions from our ROV business to be comparable to the fourth quarter and will escalate from that level throughout the remainder of the year. We are expecting another great quarter for these operations in Subsea Projects, but down somewhat from the fourth quarter. This is normally a very slow time of the year for these operations. However continuation of maintenance and inspection work attributable to Hurricane Ivan should enable us to report very good results.

In inspection we expect to see a sequential quarterly increase in financial contributions from our inspection business, but still at a fairly low level due to the seasonality of the demand for such services in Europe, where over half of our activities are located.

We're forecasting a substantial decline in the financial results from our Subsea Projects product segment during the first quarter compared to what we reported for the fourth quarter of 2004. This is attributable to a drop in our umbilical backlog margin, OIE and Multiflex backlog deliveries being longer, production timing issues associated with the delivery of raw materials, and higher engineering sales and marketing operating expenses associated with the new umbilical plant in Florida.

We expect our current high level of backlog overall and for umbilicals specifically to increase even more throughout the year, and to have an improved contribution from these operations for the full year. This is based on our expectation that results in the second half of 2005 will be dramatically better than the first half as we ramp up umbilical production in our new U.S. facility and in Brazil.

For our MOPS business segment, we are anticipating comparable financial results as all 3 of our 100 percent owned units are under contract. Operating income is expected to be down slightly due to the completion of an engineering services tieback project in quarter 4r Equity income from our investment in the Medusa Spar is expected to be slightly higher.

Our ADTECH business for the first quarter is expected to be about the same as the fourth quarter.

Now I would like to summarize our current status. Our record results for the fourth quarter of 2004 demonstrate our ability to generate excellent earnings. Our cash flow is strong and our ability to invest our money wisely is apparent. Given 2001 through 2004, which includes a wide range of market conditions, have been the best 4 years in Oceaneering's history, it is clear our technical niche market business strategy is working very well.

We have operating leverage to take advantage of the upturn in deepwater drilling and subsea completion activity which is currently taking place. Broader, deeper, longer, any way you describe the current environment, we think we are in the sweet spot of this up cycle. We believe 2005 will be our best year-to-date, with 2006 even better. Now I appreciate your interest and I would be more than happy to answer any questions.

(OPERATOR INSTRUCTIONS) Ian MacPherson (ph).

You mentioned that your expectations from the ROV segment, as they relate to your '05 guidance, are based on that 170 fleet size.

Right, those are the large vehicles.

Hoe do the smaller units, specifically the SpiderBOT acquisition, figure into the mix? How should I quantify that in terms of contribution?

We don't even regard that as a big part of the mix. We have -- Norway is the only country --.

Excuse me. SpiderBOT, which would be the ADTECH, that will be reported in ADTECH anyway.

Okay.

Okay. Well I don't think --

Your observation class.

I'm sorry. I misunderstood the question. I thought you were talking about our observation class vehicles. I don't see that that is going to be a huge increase for ADTECH.

Okay, thanks. Just another question with respect to your backlog in the Subsea Products segment. We were expecting a few months ago your backlog to be chipped away at during Q4; instead it increased by about 5 million. But you're talking about lower margins for that backlog in the first half of the year in '05.

When do you start to see -- what would be the extent of the margin decrease in general terms relative to Q4? And when do you see that improving back to sort of where you were in Q4?

That's a great question, and it is really at the heart of the whole matter. My kind of gut feeling is, first of all, I was a little surprised that we did increase our backlog in the fourth quarter. I thought that -- we have tried to hold our pricing as firm as possible. Again, we have had a lot of pricing pressure, in particularly the steel tube market.

So I was kind of surprised that we won some of the lesser orders. We just lost a big order in the Gulf of Mexico, because in that auction process of going through that bid, the margins were just too slim for us to fill up a plant in Panama City would -- marginal margin, virtually no margin -- it just did not seem like a wise idea. We really do believe that the market is going to get better. There will be a lot more specific single welt products that come into this business for us.

So I think to address your question head on, I really think the third and fourth quarters we should be achieving the margins that we had in the fourth quarter. What we're really looking IS for margins that we had several years ago. That is where we got a lot of investment in the business; and the big question is, what are going to be the margins on the steel tube umbilicals? That is really the $64 question. If I could answer that right now, I would have absolute certainty in any of my forecasts here.

Thanks John. Great quarter.

(OPERATOR INSTRUCTIONS) Tom Escott.

A couple of things. One, obviously the Medusa Spar was still down for part of the fourth quarter, although I guess the big hit to you was in the third quarter. Do you know how -- can you tell how much did the Medusa Spar being down -- how much did that ding the fourth quarter?

It didn't ding it too bad. I think the Spar was only maybe 19 days? I was going to say 15 days, but I don't remember exactly. It was kind of a mid October time period. I think bottom line is, we're looking for about $2 million in '05 over what we had in '04.

Okay, thank you. Just in looking at your guidance for the year, you have trimmed the first quarter well below former forecasts. But then you have left the full-year guidance intact at about $2. I guess by inference, that implies that you will be doing 60 cents a share plus type of numbers later in the year. Is that the inference? Is that a reasonable expectation that you're holding out here today?

I think so. That is really what we're signaling to everybody, is that -- the previous question was really right on mark. It is, what is going to drive your earnings? And it is going to be the products.

We have ramped up a lot of fixed costs in the products business. Not just the plant in Florida, but also we have functionalized our operations, we have hired quite a few people to compete in this umbilical market. If the market is as strong as we expect it to be, we do not think there is any gross overcapacity in the market. If that is the case, then pricing should hold.

If our product quality stands up, which again it should, it is just the operation of this facility, it is quite reasonable that we should be at a 60 cent type run rate; because going into '06, if we're going to make an additional 20 percent, that is kind of a normalized run rate. Now we have some seasonality and so forth, but I think that all of that is reasonable, doable, and I think expectable.

Okay, thank you.

Lee Hazel (ph).

First, going back on the products side, on the pricing, why is it as weak? Is it like you said last quarter, the same problem with someone, a competitor (technical difficulty) (indiscernible) being sold; or what is going on there?

I'm not sure I heard all of your question. But let me see if I can paraphrase it and then answer it. What I heard was, what is the problem with pricing in the Subsea Products segment?

Yes.

Okay. There's a whole lot of theories. One of my favorite theories is that, having been in this business for 36 years, I can tell you with absolute certainty that only during the time of sort of a '80 to '81 time period did I ever see the oilfield services business really have pricing power. And this is 2 years out of 36.

We just got some really powerful customers, and they will bid this work down to the last gnat's ass. When you have more than two competitors and you have the type of competition that we have, it is very difficult for all of us at the same time to perceive that there is an undercapacity, whether it's boats, rigs, umbilical manufacturing capacity, whatever it may be. It's really pretty difficult to see that, and it is really hard to get substantial pricing increases.

Personally, I think that we are moving into an era that we should have a little bit more pricing authority in the business. We are seeing the same sort of issues with some of the large subsea equipment suppliers. At a time when you would expect their margins to be rapidly expanding, they are staying even or even contracting in some cases. I'm not trying to make an excuse for that. I'm just trying to answer your question as positively as I can or accurately as I can.

Our bet is, we passed up this big order, and our bet is that we think that the market is there; we do believe that there is a significant amount of capacity in the umbilical market. There is very little capacity in the specialty market. This is a market that I think Oceaneering has got a really good fix on. It's a lot of prototype type equipment, it's a lot of specialty equipment, one-off type of connectors and things that go into subsea infrastructure.

So that has been a very good business for us. It's been expanding each year. The only place that we're really struggling in the manufacturing side is in the umbilical business, where we have got 3 other competitors and that has been a challenge for us.

What was the mix of steel in the quarter?

Gosh, I don't have that right in front of me. But it was probably higher than it has been. We had quite a bit of stuff delivered at year-end. We have got one job running now in Florida that will deliver in the first half of the year, and then the big challenge is to fill the plant for the second half.

Was it roughly 10 to 20 percent? Does that sound reasonable to you? In the quarter.

It sound reasonable. I will tell you what I will do, though; I will get back with you on the answer to that.

Is there any pressure there from steel prices going up?

There is probably more pressure from a concentration of stainless steel producers. I think the prices hold reasonably well in the bid process. I don't think that there is a lot of surprises that come out of locking in a firm fixed price on that and then factoring that into your cost structure. There is some supply constraint that we think will be alleviated this year with some new stainless steel producers. So I think worldwide sourcing of stainless steel coil tubing is going to happen.

Right. I guess the last question would be, when you talk about an improvement in the latter part of the year, looking at your backlog versus your revenue run rate, is it reasonable to assume that you're now bidding for projects which will come to revenue in Q3 and Q4?

Absolutely. We are bidding for projects that some will deliver in '06 and even some possibly in '07. One of the things is that the lead time extended out a little bit. To me that is a good sign. I think that the operators particularly -- and this is an important element, maybe I should've addressed this earlier.

For us, we're now on the bid lists with the big operators for the big projects. These are the big West African style projects. Our facilities in Brazil are ideally suited for that sort of thing. A lot of the mobilization of equipment for the construction and installation work comes out of the North Sea. Our facility there is suited for that.

No question in my mind that there is going to be some overflow that will go into the U.S. plant capacity. There's currently 3 plants in the U.S. that can deliver steel tubes. So I think that West Africa is going to absorb quite a bit of this steel tube capacity. Gulf of Mexico is still a big market for us.

John, just to summarize, so you are -- the bids you are seeing -- the business you're seeing for Q3 and Q4 is more profitable now than (multiple speakers)?

We're bidding it as more profitable. I guess that is really the uncertainty in my mind, is that we are bidding the profitability in it. We think that we have the operational capability to deliver the bid profit. The big $64 question is, does the market tighten up enough -- now that at least one competitor is totally full -- does the market tighten up enough that these bids are going to be acceptable to the customers?

Perfect. Thanks a lot for taking the questions, John, and great quarter, guys.

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

Listen, I want to thank everybody for being on the call. We did have a good year. We had a great year, and we expect this year to be even better. We think we're really doing well. We're on a good roll. We've got a lot of positives going for us, and we appreciate those of you that follow the Company. Thank you very much.

Thank you for participating in today's Oceaneering International fourth-quarter and year-end earnings conference call. You may now disconnect.