Oceaneering International Inc (OII) 2007 Q1 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Oceaneering first quarter earnings conference call. (Instructions) In consideration of other participants, we ask that each participant limit themselves to two questions per opportunity in queue. (Instructions) I will now turn the conference over to Mr. Jack Jurkoshek, Director of Investor Relations. Sir, you may begin.

Good morning, everybody. We'd like to thank you for joining us on our 2007 first quarter earnings conference call and I'd like to particularly welcome those of you who may be participating on the webcast of this event, which is being made available through the company's Boardroom Service through Thomson CCBN. Joining me this morning is Jay Collins, our President and Chief Executive Officer, who will be leading the call; Marvin Migura, our Chief Financial Officer; and Bob Mingoia, our Treasurer.

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

Good morning, and thanks for joining the call. It's a real pleasure to be here with you today. Out record first quarter earnings were above our guidance range and the street consensus estimates. As stated in the press release, our greater-than-guidance performance was attributable to inspection and subsea products performing above expectations. Subsea products achieved record quarterly operating income.

Additionally, the BP contracts we announced yesterday increase the visibility of and our confidence in achieving our subsea projects operating income guidance for the year. To have been chosen by BP, one of the world's largest energy companies, to perform this expensive scope of work is a tribute to our reputation as the leading ROV services provider in the Gulf of Mexico, with a demonstrated health, safety, and environmental performance track record.

We continue to expect to achieve a 2007 EPS roughly 20% above our 2006 record results of $2.26, and are narrowing our 2007 EPS guidance to the range of $2.70 to $2.90. this anticipated EPS increase is ultimately attributable to our business focus on deepwater and subsea completion activities.

Our ROV business had a very good quarter. Year-over-year, operating income increased by nearly 25%. This was accomplished by improving our average operating income per day on hire by over 15% through an increase in pricing and growing our days on hire by 7%.

Sequentially, the ROV operating income declined due to a normal seasonal reduction in demand and an increase in operating expenses which were largely attributable to higher costs associated with recruiting, training, and retaining personnel.

Our operating income margin was 24%, down from 28% last quarter and 27% on average last year. We do not view this as a matter of concern as our ROV operating income margin typically has been the lowest in the first quarter during the past several years. We still anticipate our 2007 ROV operating income margin will be comparable to 2006.

During the quarter, we added seven systems to our fleet and, as of the end of March, had 193 systems available for operation, up 16 from March a year ago. Our fleet mix during March was 72% in drill support and 28% in field maintenance, about the same as it was through 2006.

Our subsea products segment achieved record operating income results as OIE, our specialty products group, performed at an all-time high level. The sequential increase in operating income was, for the most part, attributable to the outstanding performance by OIE, particularly sales of ROV tooling and installation work over control system rental services.

The increase in operating income margin was due to a favorable product mix, which featured the [IWOX] service sales and an improvement in operational efficiency at our Panama City umbilical plant.

I wish I could say that the 28% gross margin performance we achieved in our subsea products sales during the quarter is sustainable, but I do not think this is a reasonable assumption. However, given our first quarter performance, we now believe our margin on subsea product sales for the year 2007 will be higher than 2006.

Year over year, both OIE and our Multiflex umbilical operation contributed to the nearly 25% revenue and 65% operating income increases. OIE's profit performance was broad based, as it was attributable to increased contributions from most of our specialty product offerings. The Multiflex profit increase was largely the result of improved performance at our Panama City, Florida, plant.

At the end of the quarter, our products backlog was $361 million, up $139 million, or $0.60, from March a year ago, and about the same as it was last quarter.

As expected and discussed in our last earnings conference call, our subsea projects business continued to perform at the same level as the fourth quarter of 2006. Quarterly operating income improved sequentially due to the gain we realized on the sale of the Ocean Service. This vessel was built in 1981 and, in our assessment, had reached the end of its useful life in our market. The retirement of the Ocean Service was taken into account in the 2007 operating income guidance previously given for our subsea project segment.

The Performer went back into service in the last week in March after completion of shipyard work started last September. We upgraded this vessel's dynamic positioning system, modernized its crane, and installed on board one of our new 200-horsepower Hydro Millennium plus ROVs. It is currently working on hurricane damage debris removal and its next job is to conduct pipeline surveys.

At the end of March, we also put into service a new saturation diving system named the Nautilus, which is currently engaged on a platform welding repair job.

Due to our recently awarded BP contracts we announced yesterday, the visibility of, and our confidence in, achieving our 2007 subsea project operating income guidance has substantially improved. Furthermore, these jobs are evidence that our Gulf of Mexico projects business has a promising future to perform hurricane damage-related work, perhaps into 2010.

As you may recall, we have chartered the Island Ranger, which has been named the Ocean Intervention III, for an initial term of three years. The BP contract we have signed for use of this vessel could end up covering the entire initial term. The charter contract term we have for use of the [Merska] tender is for one year with two one-year options. So if BP should elect not to exercise their options for continued use of the vessel beyond the initial one-year term, we have the right, but not the obligation, to continue to charter this vessel.

Our MOP segment operating income declined, as anticipated, both sequentially and year over year. The sequential decline was principally the result of a drop in contribution from engineered projects. The year-over-year decline was largely due to a lower day rate for use of the Ocean Legend.

The earnings contribution from our Medusa Spar investment, reported as equity income from unconsolidated affiliates, also declined as expected sequentially and year over year due to lower production throughput at the spar.

During the quarter, we were given notice of charter agreement termination for use of the production barge San Jacinto, effective early July of this year. We are currently investigating both the sale of and new charter opportunities for this production system and will keep everyone posted once a decision is made. The loss of profit contribution from this production system for the last six months of this year is not significant to the 2007 EPS guidance we have given for the company.

Our inspection segment had its best first quarter performance ever and achieved better-than-expected results. Sequentially, inspection's financial results were comparable to last quarter. A normal first quarter seasonal decline in demand did not occur to the extent we usually experience as we benefited from some unexpected work, which included a refinery and power station project in a large platform anode replacement job.

Year over year, inspection operating income improved by nearly 60% on an increase of revenue over 40%. This growth was widespread as it came from most of the geographical areas in which we operate and is a testament to our success in selling more value-added services and securing new contracts. The operating income increase also reflects the benefit of our efforts to control our operating expenses.

Our ADTECH non-oilfield business reported good results, comparable to last quarter and up from a year ago. The year-over-year improvement in operating income was attributable to increased work for the U.S. Navy and the absence of vessel expenses incurred last year in preparation for transferring the Performer to oilfield service. Additional Navy work was on submarines, waterfront facilities, and general engineering services.

I'm now going to turn the cal over to Marvin to discuss our cash flow and balance sheet.

Good morning to everybody. Our cash flow and balance sheet remain very strong. If you add depreciation back to our operating income, we generated over $75 million in cash flow in the first quarter, 30% more than the first quarter of 2006, and 8% above last quarter.

At the end of March, we had debt of $237 million and equity of $733 million. Our debt-to-cap percentage was 24%.

Capital expenditures during the quarter totaled $51 million. These investments were predominantly for upgrading and expanding our ROV fleet, upgrading the Performer, completion of our new saturation diving system, and facility expansions in the UK, Norway, Houston, and Morgan City.

As we discussed last quarter, we anticipate investing at least $150 million this year. This will mainly be for the same thing -- continued ROV fleet expansion and upgrades; of course, maintenance CapEx; and facility expansion.

Additionally, we are continuing to look for additional accretive acquisitions and organic growth opportunities with better-than-cost-of-capital returns, and intend to use our strong cash flows and balance sheet to further grow our earnings.

Now, I'll turn the call back over to Jay.

Thank you, Marvin. In summary, our first quarter was better than we had anticipated and we're looking forward to achieving record EPS performance in 2007 for the fourth consecutive year. Our focus on providing products and services for deepwater and subsea completions positions us to participate in a major secular growth trend currently underway in the oilfield services and product industry.

As we said in the press release and as I mentioned earlier, our business outlook for 2007 has remained the same since our last earnings release. In recognition of our above-expectation performance during the first quarter, and our increased confidence in our subsea projects forecast, we are raising the bottom estimate of our 2007 EPS guidance range. We now forecast record EPS for 2007 in the range of $2.70 to $2.90. We continue to anticipate our 2007 growth in EPS will be led by operating income improvements in subsea products and ROVs.

For specific quarter guidance -- second quarter guidance -- we are projecting earnings of $0.67 to $0.73 per share. The sequential increase for the second quarter is expected to come primarily from increases in ROV, subsea products, and subsea projects operating income contribution.

We finished the first quarter with 193 ROVs and expect to put additional new systems into service during the second quarter. We anticipate the quarterly profit contribution from our ROV business to increase, primarily as a result of increase in days on hire.

Operating from subsea products is expected to improve on strength of increases on profit contribution from both OIE and Multiflex.

We anticipate subsea projects' operating income to grow next quarter as a result of increased summer season installation and IMR demand growth and the startup of the BP hurricane damage-related platform decommissioning projects. The BP jobs will involve the use of the Ocean Intervention III for almost two months; the Merska tender for about a month. We also expect to benefit from the availability of the Performer in our second stat system for the entire quarter.

During the second quarter, we expect our inspection business to perform at a level comparable to the first quarter.

Our MOP segment results are forecast to be slightly lower due to a continued decline in engineering project activity.

We also anticipate that equity income from our ownership in Medusa Spar will drop as production is expected to decline as the reservoirs currently being produced deplete. Given our first quarter results, we now expect that Medusa Spar equity income for the year will be better than we anticipated at the time of our last conference call. This will offset some of the expected decline in profit contribution from the San Jacinto in the last half of the year.

Our ADTECH financial results for the second quarter are expected to be better than the first quarter due to an increase in work on U.S. Navy submarines and the anticipated large material procurement order by the navy.

Looking beyond 2007, we expect worldwide demand for oil will continue to escalate. Production from existing fields will deplete and the price of oil will remain at high levels. In this environment, oil and gas companies, our customers, are projected to increase their capital spending, a rising percentage of which is expected to be spent on deepwater fields. Deep water is one of the best frontiers for adding large hydrocarbon reserves with high production flow rates at relatively low finding and development costs. Consequently, we expect our 2008 earnings to be even better than 2007.

Specific signs of a healthy deepwater market that will continue to drive demand for our services and products were evident at the end of March. About 75% of the deepwater field discoveries around the world were not yet in production. Over 95% of the existing 204 floating rigs in the world were under contract and nearly two-thirds of these are contracted through 2008. Fifty-one new floating rigs were scheduled to be added to the worldwide fleet through 2011; 33 had already secured term contracts with an average length of 4.5 years. And as a side note, 11 of these operators have signed ROV contracts; we have won these 11 contracts and expect to provide 16 ROVs on these contracts.

Based on Quest Offshore's latest forecast, over the next five years, average subsea production tree orders are forecast to exceed 550 per year and demand for umbilicals is forecast to surpass 3,000 kilometers per year. These forecasts compare to an average annual demand for approximately 353 orders and 1,500 kilometers of umbilicals over the past five years -- that's a doubling of umbilical demand. We believe Oceaneering's business prospects over the next three to five years are excellent.

In summary, our results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well for both the long term and the short term. Our technology gives us operating leverage to take advantage of the high level of deepwater and subsea completion activity currently underway. And the market outlook for our deepwater and subsea service and product offerings is excellent.

We continue to believe that we are in one of the sweet spots of this up cycle. We're expecting record annual earnings for the fourth consecutive year in 2007 and with escalating demand for ROVs and subsea products, 2008 should be even better.

We appreciate everyone's interest in Oceaneering and will be pleased to answer any questions. Nicole, we're ready for the Q&A now.

(Operator Instructions) Your first question comes from the line of Scott Gill with Simmons and Company.

Yes; good morning, gentlemen.

Morning, Scott.

Jay, I think we've talked a little bit about this in the past. We keep hearing a lot about ROVs being added to the fleet in general. Can you talk about the competitive landscape? How Oceaneering is trying to differentiate itself and what that implies for ROV pricing as we look forward into '07 and '08?

Jay Collins; Well, first of all, Scott, the market continues to be very tight. We see no excess deepwater ROVs in the market at this time at all. I would remark that our competitors, our large competitors, are construction companies and survey companies who also need ROVs for their own consumption. We believe people are adding ROVs to the fleet but we do not believe that the market is in any danger of being oversupplied.

And our key competitive strength is our operating ability and our (inaudible) to never shut the rig down. So just having an ROV, we think, is not sufficient to compete against us. You've got to be able to operate at a very high level of operation and not shut the rig down. Because at these kind of rig rates, we think there's significant value to being the best ROV operator, and that's our key focus area. And so can you talk a little about day rates?

We continue to increase our prices. Clearly, our customers are strong players, but we continue to increase-- we believe day rates will continue to go up gradually. And as we said, we expect to maintain the same margins that we did last year. Costs are rising, so this is not a trivial assignment, to maintain pricing and maintain margins in this environment, but we think that we'll be able to do that.

Okay. My second question -- nice contract award on the project side. Are there more of these substantial projects to be awarded here in the coming months?

We know of another company that has another project. It's not the size of this one. So I guess I'm-- I don't think there's anything of this magnitude. This is the largest project we know of, but there are some smaller projects out there later in the year.

So there's room for some up side to your prior guidance in this part of--?

I think we don't have any more capacity. As you see, we're having to rent these vessels in. So I guess I'm not anticipating that-- while we may find some other activity, I wouldn't really be forecasting that.

Okay; thank you.

Your next question comes from the line of Neal Dingmann with Dahlman Rose.

Morning, Jay.

Hello, Neal.

Say, could you give me some color a little bit-- I was at the booth yesterday and guys were talking about some of the activity in Australia and it kind of just occurred to me -- maybe some color on some different regions. Does any-- at least in the near term, do any regions really stand out or is it kind of as you saw it in the beginning of the year?

I think it seems to be moving along pretty much as we saw. Really, our deepwater focus is Gulf of Mexico, West Africa, and Norway, the Brazil activity. We don't see-- see historically have not seen a lot of activity in Australia. Occasional jobs, really, there for us. So I would say it's pretty much as anticipated.

We saw a little bit of a slow start in the first quarter in some construction activities in the Gulf of Mexico and a couple of rigs that didn't come out for their shipyard -- we thought maybe we'd get those jobs started a little earlier. But now things seem to be picking up just fine. So I'd say it's pretty much what we thought.

There are always pluses and minuses going; there's always somebody wants it faster and somebody whose job is slipping but it seems to be pretty much netting out at this point in time.

Okay. And then, as follow-up, you mentioned-- obviously, I was looking for acquisitions. Are things still as expensive as always out there or are there things that sort of are appearing on your radar or would you even consider looking at buying some shares back?

We've said our first goal is organic growth and secondly look for acquisitions and a third alternative would be buy shares back, which we have authorization, as you know. We're still looking hard at acquisitions. We still expect to make acquisitions but you're right -- the prices are expensive. But we are not giving up on that at all. We have money to invest and we intend to get it invested.

Okay. Outstanding quarter.

Thank you.

Your next question comes from the line of [Marshall Barnett] with Capital One Southcoast.

Good morning. Congratulations on the quarter.

Thank you, Marshall.

A question for you regarding the recent contracts for the new systems on floating rigs. Should we expect to see seasonality become less of a factor for the ROV segment (inaudible) the installation of these new systems in the future?

Jay Collins; Well, I think over all you see our construction mix is one of the areas where the seasonality comes from. There's really not that much seasonality in the drilling side of the business, so it really comes from the construction side. And you see from these contracts-- these two one-year contracts are for firm one-year business that will start May-June and will work through the winter. So there will be no seasonality on these two contracts.

But I think that really won't push our business-- out of 193 ROVs, we'll have two main systems on each one of these. So 4 out of 193 wont' really push the numbers either way. But it's sure nice that these things will work every day between now and the middle of next year; and hopefully, they'll be extended. Okay. And with the increased training, recruiting, and retention costs that you're seeing, how long should we expect to see that affecting ROV margins?

Well, usually our margins in the first quarter are the lowest of the year, sometimes by 2 to 5%. It usually averages about 3%.

I wish I could say that the training and recruiting costs were going to go away but I would say this is a major area for us. It's almost a competitive advantage, I think, that we can train and recruit people all over the world and that we anticipate having the best-trained crews. I think we will continue to see training and recruiting costs.

But as I say, this is usually the lowest margin quarter of the year for us. So we will have recruiting costs in the future. Maybe some front-end loading here in this first quarter, but we wouldn't expect to see these costs go away going forward.

We have ramped up our training schools and they will continue. We have major training schools in Morgan City, in Aberdeen, and in Bataan, Indonesia, with smaller auxiliary schools in Norway, B, and Angola.

So I would, again, say it's a major competitive strategy for us to hire and retain personnel and train these people all over the world, including indigenous personnel in the countries that we're operating on. So we clearly have a global focus; we operate all over the world and we're trying to source labor all over the world. So this won't change and I think it'll be a long-term strategy that'll serve us well in future years even though it's kind of painful to have to spend this much money right now.

Thank you.

Your next question comes from the line of Tom Escott with Pritchard Capital.

Good morning, fellows.

Morning, Tom.

Just following on this last question, which was partly-- I was going to ask that. But on this ROV margin business in the first quarter -- clearly what you just said is that this whole higher cost structure for basically personnel, is what that's about -- that's pretty much an embedded cost. That's not short term and that's not going away, really.

So I guess the burden on you, then, is on the pricing side. I saw in the March quarter average pricing, day rate, days on hire, was just over $7800; kind of flattish with December. Do you now have the flexibility to be able to move pricing up 5 to 10% or has your contract structure got you locked in a great deal of the days on hire during the calendar year?

We are continuing to raise prices and we would expect to see our pricing move up every quarter. So we still feel like we have some power in the marketplace and we will continue to raise prices.

Okay. So during '06, I think your average pricing for the days on hire was, like, up roughly 20% year over year, and it was going up 4 to 5% each quarter, sequentially. And now in this March quarter, it pretty much held steady. Had you made a deliberate decision to kind of hold the pricing levels in this March period during what is normally a slow or kind of a sloppy (inaudible) time?

While we may not make 20% this year, we are having price increases and we will continue to push our pricing up. I think that's the continued focus. Marvin, you had--?

Tom, I think what we're trying to say, and the message we want to convey, is that we're going to be able to push prices up enough to maintain margins on the increased costs that you've talked about and that we've talked about. These costs are here to stay but we believe that, over the year, we're going to be successful in raising margins-- raising prices enough to keep margins constant on a year-to-year basis. And I really think that that's going to be our focus.

And with the increased number of days, the increased number of systems, and the increased costs, you're going to see the profit contributions go up that we indicated consistently last quarter and this quarter -- the $20 to $30 million.

Jay Collins; Right. Okay?

That's great. I appreciate it; thank you.

(Instructions) Your next question comes from the line of Bo McKenzie with Pritchard Capital.

Hey, Guys.

Hey, Bo.

Kind of a smaller point that you guys were talking about, but I think, Jay, you talked about the visibility of salvage work in the Gulf of Mexico going to 2010. Can you kind of give us some flavor of what you are hearing or your customers are hearing in terms of pressure from the MMS, from auditors, from insurance companies, to do something about those structures that are still on bottom? And how much urgency there is -- or, conversely, how much they're trying to push them back and leave them on bottom or whatever? So we can get a sense as to just how big that market might end up being.

Let me not overstate the case here. I mean, we have these two contracts with BP, as we've announced, and they have two one-year options in addition to the first year. So I would say this provides a little glimpse into just the visibility of this one project area where they have clearly created the option to go into 2010. Otherwise, most projects, we think, are shorter term than that; this is just a particularly long one. Our customer wants to get this job started. We have certainly felt the sense of urgency to get this contract signed and to get out and get working. So I think everyone would like to take care of their problems.

Other than that, I don't think I have any broad view of that market, perhaps.

All right; thanks a lot.

You bet.

Your next question comes from the line of Joe Agular with Johnson Rice.

Thanks; good morning.

Morning, Joe.

You-all did a great job in your press release of giving a lot of information, but I figured I'd ask this anyway. On the product side, do you want to give us any help on the revenue line? You gave the expected operating income--

No, we feel like we've pretty much given you the answer already so we'll let you work on the revenue side.

Well, I guess I'm only wondering in terms of-- you mentioned margins and ROV business over all for this year. You want to comment on margins-- very, very impressive margins in that group; almost 20% operating margins in the quarter, which are fantastic. I was just wondering if that was something that could continue.

Jay Collins; I think we've described this sector in the past as a big volume play, really, both in OIE and Multiflex. As we're pushing more volume through this business, we've expanded the capacity. So we had been a little cautious on the margins, making sure that we could deliver before we agreed that margins would be better in '07. And now, certainly, based on our first quarter, we're saying, "Okay, yeah, we probably can do better on the margins."

But I think our basic position is that it is a volume play and we expect this business to continue to grow the next couple of quarters. Let me maybe stretch it out a little bit longer, in terms of '08, given some of the forecasts that are out there for subsea completions and so forth, is there any reason why we shouldn't just track that into '08 if we use some of those forecasts as a guide?

I'm not going to predict '08 revenues; but clearly, this is a growing business. We think both OIE and Multiflex will grow in '08 compared to '07. Marvin, go ahead--

And Joe, as you know, we've talked about margins here and what happens if you increase steel tube umbilicals in our mix. And what we're talking about is the first quarter had a very favorable mix of products to give us a 28% gross margin. And we said that that would not be reasonable. But we have moved it up from flat to improved, year over year.

And I think when you look out into '08, the area that is growing the most should be steel tube umbilicals, on a percentage basis. Now, while umbilicals is about 40% of our business, I think that that is going to drive our profit up but our margins flat because the mix will be less favorable from a percentage basis. So we'll be more-- we should have greater profits but not so much focus on the improved margin percentage.

Okay. That's very helpful, Marvin. It's just very interesting to note that over the two- or three-year span here, I guess, that this segment is rapidly catching up to ROVs in terms of its overall contribution to your firm's bottom line.

Absolutely. We are very much aware of that and there is some great focus. And we would like to add additional product lines to our product business through acquisitions if we could find the right ones at the right price.

I think we're very proud of having built that segment up, Joe. And in some cases, particularly the OIE subsea tooling products, it's because of the strength of the ROV business that allows us to really have such an excellent position to provide this ROV tooling. So it's a direct drive situation between these two business segments for that subsea tooling area. So we're very pleased with that. Thank you.

Yeah, it sounds like it's all working well together. Thank you-all very much.

You bet.

Operator; There are no further questions at this time. Thank you very much.

Take care, guys.

Bye-bye.

Thank you for participating in today's teleconference. You may now disconnect.