Oceaneering International Inc (OII) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, my name is Alan, and I'll be your conference operator today. At this time I'd like to welcome everyone to the Oceaneering 2012 Q4 earnings call. All lines have been placed on mute to prevent any background noise. After the presenters' remarks there will be a question-and-answer session.

(Operator Instructions)

I'd now like to turn the call over to Mr. Jack Jurkoshek, Director of Investor Relations. Please go ahead, sir.

Good morning, everybody. We'd like to thank you for joining us on our 2012 fourth-quarter and year-end earnings conference call. As usual, the webcast of this event is being made available to the Street Events network service by Thomson Reuters. Joining me today are Kevin McEvoy, our President and Chief Executive Officer who will be leading the call; Marvin Migura, our Executive Vice President; and Cardon Gerner, our Senior Vice President and Chief Financial Officer. Just as a reminder, the 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.

And I'm now going to turn the call over to Kevin.

Good morning and thanks for joining the call. Before I get into my customary review of our fourth-quarter results, I would like to address three key points in our earnings release. First, 2012 was a record earnings year for Oceaneering. Earnings per share increased 23% over 2011. Second, we are expecting an even better 2013 and confirm our previously announced EPS guidance range for the year of $3.00 to $3.25. Our longer term outlook remains very positive. And third, we are initiating first-quarter 2013 EPS guidance of $0.55 to $0.60. I would like to remind the investment community of the seasonality of our business, especially in the Gulf of Mexico and the North Sea. Usually we earn 18% or 19% of our net income in the first quarter and about 45% in the first half of the year. Our first-quarter guidance is consistent with our historical quarterly earnings distribution.

Additionally, I would like to address our fourth-quarter operating margins for ROVs and Asset Integrity. ROV margin of 27% was lower than it has been for several years due to unanticipated expenses we incurred during the quarter. These were largely higher than normal ROV umbilical repair and maintenance expenses, and a UK pension plan expense adjustment based on revised actuarial assumptions. This pension adjustment also affected our Asset Integrity results. Absence these expenses, our ROV margin would have been 28% for the quarter and 30% for the year. We continue to anticipate a 30% annual margin for ROVs in 2013. As has historically been the case, we do expect some quarterly variations.

Asset Integrity margin was unusually low due to costs we incurred associated with closing a unprofitable operation in Sweden acquired with our December 2011 acquisition and the UK pension plan expense adjustment. Without these expenses, our Asset Integrity margin would have been 11% for the year. We continue to anticipate our Asset Integrity operating margin in 2013 will be in the range of 11% to 12% as it has been for several years prior to 2012.

I'd now like to review our operations for the fourth quarter. Earnings per share of $0.74 for the fourth quarter of 2012 was 37% above that of the fourth quarter of 2011 on income improvements from all of our operating business segments led by Subsea Products and Subsea Projects. Subsea Products operating income rose year-over-year by more than $17 million or 47% on increased demand for tooling and higher through-put at our umbilical plants. Operating margin of 22% for the quarter was 3% higher than in 2011. This was attributable to a favorable product mix, to more tooling, and an improvement in umbilical margin due to increased volume and a favorable mix change to higher margin thermoplastic hose product. Year-over-year fourth-quarter Subsea Projects operating income increased by over $15 million or 16% due to the services contract offshore in Angola which commenced in February 2012, and some improvement in Gulf of Mexico deepwater activity.

Year-over-year ROV operating income increased on a 10% increase in days on hire notably in the Gulf of Mexico. During the quarter we put nine vehicles into service and retired five. Our fleet mix usage during the quarter was 75% in drill support and 25% on vessel-based work. This compares to a fleet mix usage of 79% and 21% a year ago and 73% and 27% last quarter.

Our overall fourth-quarter EPS result was slightly above our guidance range on better than forecast results for our deepwater vessel operations and a higher margin on Subsea Products sales. Our deepwater business in the Gulf of Mexico benefited from unexpected work and lower than forecast drydock expenses. The unexpected work included a job for two vessels to provide ROV support on a drilling operation. This was required to address a problem with the connection between a lower marine riser package and the BOP. We expect to see an increasing call-out business for our vessels, ROVs, and tooling as deepwater drilling in the Gulf of Mexico continues to be closely scrutinized. Subsea Products margin was higher as our sales mix had more tooling and IWOCS services than we had forecast.

Moving on to our total year 2012 operations, our earnings of $289 million and earnings per share of $2.66 were the highest in Oceaneering's history and were largely attributable to our global focus on deepwater and Subsea completion activity. For 2012, each of our five operating business segments achieved higher income. We achieved record operating income from our ROV, Subsea Products, Asset Integrity and Advanced Technologies businesses.

ROV operating income rose for the ninth consecutive year, an accomplishment we are quite proud of. This was attributable to higher demand, notably off Africa and the US Gulf of Mexico, to provide both drill support and vessel-based services. We increased our days on hire by more than 9,000 days to over 82,000 days. Our fleet utilization rose to 80% from 77% in 2011. During the year, we grew our fleet to 289 vehicles, up from 267 at the beginning of the year. We added 37 vehicles and retired 15 older systems.

In 2012, 14 new floating drilling rigs were placed in service for operations other than Petrobras -- for operators other than Petrobras in Brazil and we had ROVs on 10 of them, with two on one rig, for a total of 11 vehicles. For the first time since 2008, we experienced growing demand in 2012 for ROVs to support vessel projects. In response to this demand growth, 16 of our new ROVs were placed into service on board vessels. This equaled the total number of new ROVs we placed into service on vessels during the prior three years. At year-end, we estimate that we continue to be the largest ROV owner, with 36% of the industry's work class vehicles, with a fleet size 75% bigger than the next largest ROV fleet. We remain the primary provider of ROV drill support service with an estimated market share of 56%, more than twice that of the second largest supplier.

Moving to Subsea Products, operating income increased primarily on higher demand for tooling to support deepwater drilling operations and IMR or Inspection, Maintenance and Repair projects. Tooling to support drilling included ROV accumulator reservoir skids to perform tests on BOPs, BOP panels, and well containment spill response hardware. Tooling to support IMR projects featured use of our flow line remediation system to eliminate hydrates and large diameter or long offset flow lines, and our asset injection system to perform well stimulations. Operating margin increased to 21% from 18% in 2011, due to a change in product mix. Umbilical revenue as a percent of our total products revenue 2012 was 28% compared to 35% in 2011. Our year-end Subsea Products backlog was $681 million, up 78% from $382 million at the end of 2011. This backlog growth was largely attributable to three large umbilical contracts we secured, which in total added nearly $245 million to our backlog. One of these, the largest umbilical order in Oceaneering's history, is for Petrobras first large presalt project.

Regarding Subsea Projects, operating income increased in 2012 due to recovering demand for our deepwater services in the Gulf of Mexico and commencement of the field support vessels services contract offshore Angola. Under the services contract, we supply product management, engineering and two charter vessels each equipped with two Oceaneering ROVs and associated tooling. This contract enabled us to achieve a meaningful international expansion of our deepwater vessel project capabilities. As for the Integrity operating income improved on higher service sales in most of the major geographic areas we serve, markedly in Norway, due to the acquisition we completed in December 2011. Operating margin was lower largely as a result of costs we incurred in assimilating the acquisition. Advanced Technologies profits were up on engineering and vessel maintenance work for the US Navy and theme park project activity.

Our 2012 capital expenditures were about $310 million, of which $198 million was spent on expanding and upgrading our ROV fleet. We added 37 new ROVs to our fleet, the most since 2004 when we added 49 vehicles largely with two acquisitions. We invested $68 million in our Subsea Products business largely to increase the capabilities of our umbilical plants in Brazil and Scotland and to expand our suite of Subsea rental tooling. in addition to our capital expenditures, we repurchased 400,000 shares of our common stock for $19 million and paid $75 million of common stock dividends during 2012.

At slightly over $600 million, our 2012 EBITDA was also a record high. At year-end, our balance sheet remained conservatively capitalized with $121 million of cash, $94 million of debt, and $1.8 billion of equity. In summary, we believe our annual 2012 earnings performance and cash generation were excellent. The price of Oceaneering stock rose by nearly 17% during 2012. We believe this was in recognition of our financial performance, actions we took to enhance shareholder value, and our future business prospects. Our share price percentage increase was greater than all but one of the other companies in the Oil Service Sector Index or OSX which by comparison rose only about 2%. Oceaneering is thriving. I recognize, in fact, our employees who made this possible. Their commitment to safely provide high quality solutions to our customers' needs is the foundation for our continued success.

Now let's talk about our 2013 EPS outlook. Looking forward, we are reaffirming our 2013 EPS guidance with a range of $3.00 to $3.25 based on an average of 108.5 million diluted shares and an estimated tax rate of 31.5%. The detailed business segment outlooks that I reviewed on our last earnings call in late October 2012 are fundamentally unchanged. We continue to expect each of our operating business segments will achieve higher income in 2013.

We do have more information to offer on operating margins. At the midpoint of our guidance range, we expect our total margin in 2013 will be flat to up compared to the 15% we achieved in 2012. We are anticipating some margin improvements in 2013 from ROVs and Asset Integrity for the reasons I previously stated. Subsea Products margin is expected to be lower due to a change in product sales mix having more umbilical revenue. Subsea Projects margin is also expected to be lower from a reduction in our Gulf of Mexico vessel availability due to regulatory inspections and associated expenses. Advanced Technologies margin is forecast to be slightly higher due to a change in contract mix.

During 2013, we anticipate generating at least $675 million of EBITDA. Our balance sheet and projected cash flow provide us with ample resources to invest in Oceaneering's growth. Our CapEx estimate for 2013, excluding acquisitions, is $300 million to $325 million. Of this amount, we expect $175 million to be spent on adding systems to our ROV fleet and vehicle upgrades. About $100 million is for enhancing our Subsea Products capabilities. Our focus in 2013, as it was in 2012, will be on earnings growth and investment opportunities, both organically and through acquisitions.

Moving on to our first-quarter 2013 outlook, as I stated earlier, our EPS guidance range is $0.55 to $0.60. This is consistent with the fact that our first quarter earnings are customarily lower than the fourth quarter of the previous year. At the midpoint, this would equate to 18% of our annual guidance range, which is within our historical first quarter percentage range. Over the last 10 years, we have averaged 19% of our earnings in the first quarter, with a typical band of 17% to 21% for any particular year. Our first-quarter 2013 guidance at the midpoint is up 22%, compared to the first quarter 2012, as we expect all of our business segments to achieve higher operating income led by Subsea Products. Compared to the fourth quarter of 2012, our first-quarter guidance is lower based on anticipated reductions in operating income from Subsea Products and AdTech due to project timing and Subsea Projects and Asset Integrity due to seasonality.

Looking beyond 2013, we remain convinced that our strategy to focus on providing services and products to facilitate deepwater exploration and production remain sound. We believe the oil and gas industry will continue to invest in deepwater, as it remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates and relatively low finding and development costs. Therefore, we anticipate that demand for our deepwater services and products will continue to rise and believe our business prospects for the next several years are promising.

At the end of 2012, there were a total of 93 new floating rigs on order. 64 of these rigs are not contracted to work for Petrobras in Brazil, and we expect all of them will go to work for other operators. On these 64 rigs, 17 ROV contracts have been let, and we have won 13 of them, leaving 47 ROV contracting opportunities left to be pursued with customers other than Petrobras in Brazil. At the end of December, 99 of the 142 existing high-spec drilling rigs, consisting of dynamically positioned fifth and sixth generation semis and drill ships, were contracted to operators other than Petrobras in Brazil. We had ROV contracts on 73 of these for a market share of 74%. If all 64 of the non-Petrobras rigs I mentioned are placed into service, this fleet of 99 will grow 65% to 163 rigs. So the visibility of the secular growth outlook for this market remains very promising.

In looking forward, we see no reason why we will not continue to be the dominant provider of ROV services on these rigs. Each additional floating rig represents an opportunity for us to put another ROV to work in drill support service. As the use of floating rigs grows, we believe it is inevitable that discoveries will eventually drive orders for subsea hardware to levels not previously experienced, and demand for ROVs to support vessel-based activities should follow.

Quest Offshore's latest subsea hardware forecast for the period 2012 to 2016 includes an increase in tree orders of about 65% over the previous five years. In 2012, subsea tree orders are estimated at 504, an all time high, eclipsing the previous record of 426 trees in 2006 by 18%. In 2013, tree orders are projected to rise over 20% to 620. While we don't make trees, orders for subsea trees drive demand for a substantial amount of the ancillary subsea production hardware that we manufacture. For example, Quest is forecasting nearly a 40% increase in umbilical orders for the five-year period 2012 to 2016 compared to the previous five years. Umbilical orders in 2013 are forecast to rise to about 1,900 kilometers, up 65% from the estimated 1,150-kilometer level in 2012.

Furthermore, renewed industry and regulatory emphasis on safe and reliable operations is providing additional opportunities for us to demonstrate our capabilities. With our existing assets, we are well positioned to supply a wide range of the services and products required to safely support the deepwater efforts of our customers. We believe Oceaneering's business prospects for the long term remain promising. Our commanding competitive position, technology leadership, and strong balance sheet and cash flow enable us to continue to grow the Company, and we intend to do so.

In conclusion, our results continue to demonstrate our ability to generate excellent earnings in cash flow. We believe our business strategy is working well over both the short and long term. We like our position in the oil field services market and are leveraged to the growth of deepwater and subsea completion activity that is currently underway. The longer term market for our deepwater and subsea service and product offerings remains promising. Renewed industry and regulatory emphasis on reliable deepwater equipment with redundant safety features has caused our customers to be even more focused on risk reduction. This elevates the importance of the utility and reliability of our ROV services and related product line offerings and reinforces the benefit of our value sell. We achieved another record year of EPS performance in 2012 and expect that 2013 will be even better. We believe this distinguishes Oceaneering from many other oil field service companies.

We appreciate everyone's interest in Oceaneering. I will now be happy to take any questions you may have.

(Operator Instructions)

Ian McPherson.

Hello. Thank you. I was curious about your recent award for the three control systems for Transocean and wonder if you could comment on the outlook there? If there's somewhat of an inflexion with regard to those types of units or if you see that order within the course of your expected steady growth rate for that part of the business?

I wouldn't expect any inflexion in there. I think that Transocean is changing some systems to conform to the API 53 standard, but at present, no one in the regulatory side or the operator side has really said that they are going to adhere to that standard. And this could vary widely between the Gulf of Mexico and other areas of the world. So it's pretty difficult to say at this point what that would mean in the future.

Okay. You also commented there towards the end of your remarks on the strong volume growth from umbilicals demand. It would appear that even with that, we probably stand to be significantly over supplied for the foreseeable time frame at least this year. How do you see, over the next year or two, the margins evolving for umbilicals just based on, you know, volumes and absorption even without pricing?

I think that you are absolutely correct that there still is far more capacity in the marketplace than there is demand. I would expect that margins on a per job bid basis aren't really moving very much. However, volume is contributing to absorption for us, and that is benefiting our business.

And I think also is as you mentioned, it really depends upon the mix of thermoplastic and steel tube that has a substantial impact. So I think there's a lot of moving pieces, but as you imply, the greater volume allows for more efficient absorption of our fixed costs. So I mean that is a very favorable thing in a market that is plagued with over capacity.

Yes, absolutely. Is there any way that you could take a rough stab at quantifying some of that absorption benefit?

No. Not really. I mean it will depend upon how the years play out, and we really do not give margin information on sub-segment pipelines.

Okay. Well, I appreciate all the good granularity in your opening remarks. Thanks.

Ole Slorer.

Thank you. Just to clarify again on the ROV margins that came down sequentially. You highlighted, but was there anything operationally that changed the trend here or is it something that we expect margins to normalize again as we look out a few quarters?

We do expect margins to normalize in 2013, yes.

Okay, great. Secondly, on the Subsea equipment companies that have reported so far. Subsea processing has been a big theme, and as this increases in complexity of seabed systems, how does that impact you the most? Will it be from the monitoring side on the ROVs are the biggest opportunity or is it the increased demand for umbilicals or projects? Have you thought about this at all?

Yes, we have, and I think that there will be some increased demand for umbilicals, power cables, and what not to hook all this stuff up. And additionally, I think that requirement for ROV tooling to interface with this subsea hardware will grow as a result and ROV use with that.

If this is new projects, new capabilities that get acquired through M&A or do you have everything in-house that you need?

I don't really see anything changing dramatically in terms of what would be needed. I mean it really is the same interface hardware issues that you have with anything. And we might have to design some tooling or whatever, but that's a normal part of our business, so I don't see anything dramatically changing in that regard.

Okay. Tick up your CapEx this time a bit from a normal run rate. What was the main reason for that? Where do you see? Where is your channel increase?

Ole, I think we said -- yes, we did kick it up a bit when we got our detail plans and the outline that Kevin gave, was it $300 million to $325 million?

Yes.

So I just think it's -- we're spending probably a little more on enhancing our Subsea Products capabilities than what we had originally expected.

Okay. Thanks for that [narrative] and I'll hand it back.

Jim Wicklund.

Good morning, guys. Speaking of umbilicals and, Marvin, you're talking about mix, what's the best thing you can sell? If you could have, I know this isn't realistic, so we're being hypothetical, but if you could sell 100% of X out of your umbilical business this year -- or in '14 we'll be, and it's the biggest home run, what would you sell? What would it be?

All thermoplastic and the reason, let's just go a little bit further down why --

You bet.

Is because what you start with in raw materials of a thermoplastic umbilical is boxes full of plastic pellets, and wire, and Kevlar, and armor -- armoring wire. And when you start with steel tubes, you start with reels of steel tubes. So basically a steel tube umbilical consists of bundling, and thermoplastic consists of manufacturing. You start with extruding. You do -- it is a real complex value-added, turning raw materials into a functioning umbilical as opposed to bundling steel tubes and adding other capabilities, like fiber optics, and things like that to them. But there's higher input costs with steel tube and more value-added to thermoplastic.

And realistically what will be the mix between those two this year and next year?

We really don't know. I mean it's an operator thing. I mean I think you tend to get more thermoplastic hose in the North Sea where it's shallower. You don't have some technical issues involved with the ultra deepwater, although Petrobras has stuck with thermoplastic or variants of thermoplastic for their leads down there. But otherwise it's generally a steel tube idea.

Okay. That's very helpful. And second question, if I could. IPAM, of course, made some announcements the last couple weeks that spooked everybody in terms of offshore construction. Your vessel call-out business in the Gulf of Mexico has been -- saw some issues following Macondo. Can you specifically talk about the global offshore construction market that relates to you, and how it's changed in the last month or so, the outlook?

I don't really think so. As you know, we're not really involved in the construction market. But we think that the activity in the construction market is an indicator of what is to come, i.e, more stuff on the seabed means more opportunity in the future for ROV tooling and ROV intervention. But apart from that we're not engaged directly in it.

I understand that, but your vessel call-out work in the Gulf of Mexico has been impacted by the work and then lack of work in the Gulf of Mexico.

Yes.

I'm just curious as to whether any of that, and your answer is obviously no, but if any of that has any impact on your outlook for the business, your non-rig vessel business?

Jim, let me go ahead and give you just repeat what Kevin said. For the first time since 2008, in 2012 we experienced growing demand for ROVs in vessel base. We added 16 of our new ROVs were placed into service on board vessels. So I think that we --

That's a positive outlook.

That is a positive outlook. Now will it continue into '13? It is -- we see more vessel work on the horizon. We see more ROVs in the total fleet compared to the number of ROVs servicing drilling rigs.

How many ROVs do you plan on adding this year to that business?

Well, we plan on adding 30 to 35 ROVs and the mix we'll determine as the --

And typically the vessel opportunities are a lot more short-sighted than the rig opportunities, obviously as per visibility with us. So that's why it's hard to predict for us what's coming, because we usually find out right about when they need them.

I think from of a construction stand point, while we don't participate in it, the fact that the construction industry as a whole has more backlog -- I mean more -- yes, more backlog this year than earlier years, speaks well for that business, all be it as IPAM noted, it might be at lower margins. But we just see an increase in activity, and if you see an increase in drilling activity, an increase in construction activity, there ought to be an increase in IMR and installation hook-up work that we do participate in. So we are not bearish at all on our vessel-based business, and it just depends upon how bullish we want to get, depends upon how many times the phone rings that day. So because Kevin said it is a shorter term call-out business.

Perfect. Thanks, gentlemen, very much.

Justin Sander. Their line is open for you now.

Hello. Good morning. Just had one follow up on the last comment there. Looking at the utilization outlook for the ROV fleet in 2013, I think where you guys are at is somewhere around 82% utilization, growing from 80% in 2012. Would that -- does that occur with the mix of fleet -- the mix of vessels that are ROVs that are on vessels versus drill support? Does that mix stay static in 2013 from where it was in '12 to get you 200 basis points in utilization improvement?

It basically is a reflection of better utilization on the vessel-based ROV systems.

Okay. So stepping away from that, I had a question on the Subsea Products margins as well. So for the second quarter now, running higher than what we were expecting and you mentioned obviously heading back down in 2013, primarily from umbilicals increasing in the mix. But on the other hand, with higher tooling and higher IWOCS, I'm just wondering if this business could be a better margin business than the high teens margin that we've looked at in the past?

We really think that high teens is really the best expectation to have there, and I mean you get better visibility. We get better visibility on the umbilical side because they're longer lead time orders. The tooling side can be a lot shorter cycle, and sometimes that's surprises, and you get more volume there and that offsets the umbilicals. Sometimes you don't. So our best view at the moment is what we just said. We are expecting more on the umbilical side as a percentage of that total than we experienced in 2012. Although we didn't predict all that because it just happens on the tooling side. So it is what it is

We thought that we would characterize the second half of product margin in 2012 as a very pleasant surprise as opposed to a trend.

Okay. Do we have -- so what's the visibility like on the tooling side? Is it really limited to the next quarter out and that's about it, or can you see that being a higher percentage of the mix well into the first half of 2013?

No, it's a much shorter cycle, and it's more of a quarter-to-quarter thing than it is anything else.

Okay. Appreciate it. Thank you.

Justin, a lot of it is call-out work depending upon how many problems an operator incurs, such as a plug to a flow line that needs remediation or something like that. So the visibility really is short-term.

Okay. Appreciate the clarity there. Thank you.

Mike Urban.

Thanks. Good morning, guys. So you mentioned a couple times in your comments about the ongoing and increased scrutiny and focus on safety which is global, really, but in particular in the Gulf of Mexico. We know about the story for new builds as it pertains to ROVs, and that's been a great story and should continue to be. What we've been seeing a lot of those new builds have startup issues and it seems like that will continue. Is that something that could help some of the other parts of your business, like Projects? Sound like you saw a little bit of that already. Is that part of the story that's maybe under appreciated?

I think the delays in rigs getting accepted, because of shakedown issues and what not from the shipyard, does not really help us. I mean, it just delays us going on higher in our business stream. So that is not helpful, and there's no other business that would come in as a result of that. I mean the note that we made about our Projects business being a little up from what we had thought it might be in the fourth quarter was a problem that a rig was having. But it had been accepted, and it had been drilling and whatever. So that was just something that happen. So I wouldn't -- that's a by incident thing. I really wouldn't read anything into that.

I don't think it's a needle mover, but I do think that we -- I know we expect that to be -- the reason we highlighted it was because it was vessel-based activity to support drilling rig. Usually the drill rig support is the -- provided by the ROV that is on the rig. But in a problem situation, there was a call-out for a vessel with an ROV, too, to come out and help with this connection between the lower marine riser package and the BOP. So I think the increased scrutiny when there is a problem, operators will respond with extra support and that -- we don't know if that's a trend or it's just a per incident basis, and that's what we highlighted.

Okay. Got you. So it's the traditional reasons, more rigs is more ROVs, it's more subsea work all of which is good for you.

Right, right.

And then you characterized the products margins as a pleasant surprise. But at the same time, I mean the -- just anecdotally, they don't have a lot of visibility. But anecdotally, activity is continuing to improve. Subsea work is continuing to improve. I've got to believe demand and the ability to extract pricing is got to be improving. So I guess other than the mix issues associated with more umbilicals running through, why wouldn't there be upward pressure on margins over time?

Well, we still -- we believe that there is twice the capacity for manufacturing as there is demand. So it's pretty hard to -- I mean everyone else can always do another job. You know, so you're bidding on that basis, and it's pretty hard to move margins in that environment.

I think it is primarily the mix. The large increase in our products backlog is associated with three large umbilicals. So we expect that mix. And as you know, it's some of it and most of it is with Petrobras. So therefore, they're not the highest margin customer that we have. And so, if you're looking at a change in mix being umbilicals, and a lot of it being in Brazil, I mean that is the curve ball that you address So, I think that keeps our -- the mix is what keeps our margins at a healthy high teens level, with some variation from quarter to quarter.

But on the whole product segment, as we said earlier, the non-umbilical part of the business can surprise. We don't have the visibility to that, and we expect it to continue to be good, which is why we're saying that, that whole segment is going to be better in '13 than it was in '12, so --

Right.

That's really what I was trying to isolate. I get why margins on a mix-adjusted basis or on a reported basis come down for umbilicals, but separating that out, you know, it's -- I don't see why the improvement that you saw in the second half would necessarily be surprising. You saw a lot of work, and it was clearly good margins. But everything is pointing in the direction of more demand, presumably more pricing, more margin, and then we just have to adjust for that mix. Is that a reasonable way to look at it?

Yes, but let's go back. If it wouldn't be for the strong market that we're talking about in these other areas, with the increased mix towards umbilicals, we would be predicting margins to be going down. So what we've got working for us is increased through-put, as we addressed earlier about the cost absorption. So if we're getting more efficient at our operations because we have more steady through-put and because of increased other work that is non-umbilicals that is helping us to sustain our margins at that high teen level. Otherwise, we would be talking about margins going down.

Right. So again X umbilicals, though, your margins are not going down?

No.

No.

Okay, cool. That's all for me. Thank you.

Brad Handler.

Thanks, good morning. If I could focus, I guess, on the Project side of the business. Maybe just to first to clarify it for me is, I think you just answered it but I'll ask it more directly. Is the inspection of H4 bolts globally that is now expected, does that have an impact on your business?

No, it does not. That is -- that's entirely with the drilling companies and their suppliers and what not and doesn't really impact us.

So there's no ROV inspection opportunity? There's no vessel [beast]? (multiple speakers)

No, no. This is a topside event when they get everything back on deck again, and if they need to change them out, they change them out, assuming they got a spare set available.

If there is an issue with the connection while at subsea, then the answer would be yes. But that is a rare occurrence, and we don't expect that. We expect all of it, as Kevin said, to be done topside.

Right. Pulling it. Okay. Fair enough. More broadly I think, I'm not sure I followed the guidance you mentioned, but I think you mentioned lower Projects margin because of a little less Gulf of Mexico availability?

Yes.

Is that simply by -- is that simply year-on-year because you've moved vessels to West Africa?

No. I mean it really is -- I mean what we're trying to characterize is that we do see as a market the Gulf of Mexico, you know, in that segment should be better in '13 than it was in '12. However, offsetting that for us is the unavailability of several vessels as they go through regulatory inspections and associated expenses.

Oh, I'm sorry. I only half-caught that. I understand, okay, got it. Aside from the regulatory inspection, is there a way for you to characterize capacity utilization in the Gulf in '12, of the vessels? Is there a way for us to think about how much more work you could have done on a call-out basis?

We don't really give -- there's just very little visibility on call-out basis. It really is -- how much IMR there's going to be. And one other thing in addition to the drydock, we've got the first quarter availability of a chartered vessel to be renamed the Ocean Alliance that is going to be out for the first quarter as we're going through some upgrades. The vessel is going through some upgrades, so that before it starts a long-term charter with us. So it really is vessel availability and drydocking, as Kevin said, and is really too hard to predict what the call-out market's going to be because that has the least visible aspect of our segment lines.

Okay. If I may steal just one more in the same area. Maybe what would it take for you to -- what contract or commitment or opportunity would it take for you to consider adding a vessel, whether it's in the US or whether it's in West Africa or somewhere else?

A long-term contract.

Fair enough.

Tell our clients. (laughter)

If it were to be in Angola, for example, would it need to be five years, 10 years? Is it a very significant duration?

No. I mean I think we -- what we're -- by launching a contract, someone would need to commit to the vessel for at least a year which would be practical in the Gulf of Mexico. If it was going to be an international deal, you would expect it would be more like a three-year contract with maybe some options.

And, Brad, when we're talking about adding a vessel, we're not necessarily talking about building one and buying one and owning one. We're talking about, I mean, we would look at the economics at the time, but every time that we have recently looked at the economics of lease versus buy, we have chartered. So we're talking about -- it would take a long-term contract for us to enter into a matching charter arrangement. What it would take for us to build a boat would have to be a specific need that we would want to see longer-term type visibility on.

Makes sense. Okay. Thanks, guys.

Ed Muztafago.

Hello, guys. Just want to follow up on the BOP control system question a little bit. I just want to make sure I heard you guys right. Are you seeing any increased inquiries from customers on control systems due to the constraints among some of the other OEM manufacturers?

We are not.

Okay. How should we think -- maybe these are the only orders you get or maybe you get some more, but how should we think about the margins on these? Are these better than average segment margins? There are probably $10 million to $15 million each, so they do move the bottom line.

It's really hard to give -- with one customer and one contract. It would be inappropriate for us to talk about how profitable that contract is. So we don't think it's going to move the needle of our -- we've given that indication, that what we expect for our product segment. And so we really do refrain from talking about profitability of specific contracts.

Okay. That's fair. And I guess, secondly, this is also a follow-up on umbilicals, maybe just to try to help us understand a little bit better. You've got volume-based margin improvement. You have, what were admittedly Petrobras words, but thermoplastics which carry, I think, a higher margin due to the manufacturing component. So are we getting closer to the point where umbilicals are non-dilutive or can we get there with more volume and a better mix of thermoplastic or do we have to have pricing improvement?

I'd say we have to have pricing improvement.

There's an easy reason for that because umbilicals doesn't have a service component. The other ones that have higher margins have a service component associated with it. And so when you are sending out a piece of kit with a technician, you get a higher margin for providing that service. If you're delivering something to the dock that gets picked up, that's usually going to be -- you've got to have pricing improvement to help move that margin.

Okay. So I guess generally speaking as we think about products, we could think about anything that carries a service component as being higher up in the margin tier?

Absolutely.

Okay. That's it for me. Thanks, guys.

Jon Donnel.

Morning guys. Had another follow-up question on the Project side of the business. Really of significance sequential increase from third quarter to fourth quarter clearly. You mentioned some increased demand year-over-year in the Gulf of Mexico. I was wondering if you could help us with how much of that was the continual ramp-up of the BP project. And as you've gotten about one year into that contract here, are there additional revenue opportunities from the Project side that you're seeing or is there going to be some variability around that quarter-to-quarter as we go through the year?

I'm just trying to think how we -- the work of modeling that through 2013. I expect there's going to be less seasonality overall in the business there. But I was wondering if you could help us out with breaking up those pieces for us a little bit?

On the Angola side, we've been experiencing the run rate of that for the last two quarters. And so we don't really see that changing dramatically into this year, unless BP should decide to exercise an option to add another boat, which we don't see on the horizon at the minute. So basically that is at the run rate that it has been for the last two quarters. So the variability that you would be seeing is the Gulf of Mexico, and it is still very difficult to predict how that's going to go.

I think that we did have this one-off, two vessel utilization in the fourth quarter, that normally, we wouldn't have expected that to happen. It's usually a lot quieter in the fourth quarter, but if there's a problem, then you get out there. So that was a one-off event. But I think we do expect the Gulf to keep picking up in terms of demand for vessel services for the deepwater side. Diving was very weak last year, and we believe that there was still a lot of difficulty in operators getting permits to do things that they wanted to do, and that had an effect on the business. We are hoping that, that will be picking up this year as well.

And, Jon, it's the most difficult segment to model internally and externally because of the variability of the Gulf of Mexico vessel utilization. As Kevin pointed out, there's two pieces of it. It's the deepwater and the diving, and we need strengthening in that area and more activity for us to become more predictable in our run rate.

Okay. But there won't be any of that seasonality impact coming from Angola, then, it sounds like. So that's helpful. And then in terms of just the drydocking schedule on those vessels for the Gulf of Mexico, is that going to be concentrated more in first quarter Is that a big driver of the sequential declines there?

They're actually being spread out throughout the year for a variety of reasons. And we're not going to preannounce when they're going to happen or how long or how much we're spending on them.

But the answer is no, it's not. They're spread out, more spread out than I actually would have thought because it is dictated by the time that your certificate expires. So it is more spread out than concentrated.

Okay. That's helpful. Thanks for taking my questions, guys.

Tom Curran.

Good morning, guys. So I'm sorry if I missed this. You've always provided it in the past. What was Multiflex as a percentage of Subsea Products total revenues for the full year 2012?

28%.

28%.

28%, terrific, thank you. And I doubt I'm going to win the Sherlock Holmes award for this, but I'm going to go out on a limb and assume that the capability enhancements you made there in Scotland and Brazil based on your exchange with Jim, were entirely on the thermoplastics side?

No.

No.

Okay. So could you share some color, then, given how much you continued to pound the table on the remaining overhang of capacity out there? What was the nature of the investment you made?

Let's start within Brazil, when Petrobras said we need to be able to handle larger diameter umbilicals, and we need to put them on different size reels. We had to re-equip the plant to handle larger diameter. We had to increase the size of the reels and increase the material handling capability, which included reinforcing the dock and a lot of things associated with handling larger reels. They went to a standard. They changed the standard of how they want to accept materials. Umbilicals to be the same as flexible pipe, and so that required modification to be able to meet that demand. And in Rosyth, we added capabilities to introduce an integrated umbilical which would include a mig injection line down the middle of it, welding capability, and carousel capability, storage capability.

Okay. That's helpful. And so within Subsea Products across your other lines, on a geographic basis, it seems like we all struggle with Subsea Products that you occasionally get these one-off spikes in demand that are opportunistic or Project specific. But you also have these ongoing secular uptrends in demand just based on the expanding amount of infrastructure out there. So when it comes to your other Subsea Products businesses, geographically in 2012, what surprised you to the upside the most that you expect to be sustainable, and what disappointed you the most?

Oh, that's a hard question.

That's a hard question. What's surprised us the most to the good was IWOCS work in West Africa. And whether it's sustainable or not is what makes it difficult question. The flow line, remediation jobs in the Gulf were the other thing. What has been sustainable is the tooling side, the BOP reservoir skids that have been -- we've grown that size of the fleet, and that is sustainable, and the well containment support. So it is a mixed bag, but it's really hard to pick a couple of things that we say moved the needle and will continue to keep it and what disappointed --.

We don't talk about this point. (laughter)

Nothing. Nothing disappointed is the answer.

If it was too predictable, it would just really be boring. (laughter) There's nothing else we could say.

You don't got to tell us. We're the one's trying to model Subsea Projects.

I guess what was disappointing is -- but it was predictably disappointing, I guess, is the lack of umbilical orders for the Gulf of Mexico. But we saw that coming. So that's been a -- we wait for the day when -- and we see it coming with all this exploration activity in the Gulf. We actually see a day when the Panama City plant is going to have increasing backlog to support Gulf of Mexico, and we'll stop chasing international projects to have through-put there.

Okay. Thank you for such a thorough candid, answer there. Last one for me, on the Subsea Products again, how much of the 2013 CapEx range is going to be allocated to Subsea Products, and then what's the rough percentage of that, that's strictly going to be for rental tooling inventory maintenance?

Well, first off with the guidance is around $100 million on Products and we're not getting into the break out.

Would be it fair to assume that the maintenance spending for the inventory of rental tooling assets is going to see the strongest growth rate?

I mean the maintenance for inventory of tooling is expensed. You're talking about the growth of how --

I guess replenishing the asset inventory given the growth you're seeing there.

Okay. So growth.

Okay. So we're talking about the growth, and we're really not giving out sub-segment allocation of CapEx.

We spent what did we say $68 million on products in 2012.

And we think it's going to be $100 million --

$130 million this year.

That includes a wide range of our product lines within the segment.

Right.

Fair enough. Thanks for the help, guys.

Darren Gacicia.

Thanks for squeezing me in. I'm trying to triangulate around a few things here. It seems to me when you're talking about ROV adds this year, the balance of what's going towards vessels is increasing versus what's maybe been going towards rigs. So if I think about that, you've had a lower market share on the vessel side, but if I understand it correctly, you split that with the remainder the vast majority being more the E&C companies. If volumes are going to increase in terms of the amount of work needed, do you find yourself gaining share on the vessel side, maybe being co-opted more by the E&C companies in order to meet their on-demand? How does that business look from that perspective?

I don't -- we don't really see market share growth there. I mean that segment of the market is growing, and if we continue to pick up vessels there, I don't think that really changes our overall market share very much. There are a lot of boats out there that are available. There's a lot more under construction, like the drilling business only many more. And so there is really no constraint for the construction companies or the survey companies to pick up a boat, put an ROV on it and go to work. So we don't really see any tightening there or anything that would increase our market share as a whole for that segment.

We're not taking any work away from them, and they're not giving us any work, yes. So it is the fleet -- the ROV vessel fleet is growing on an independent fleet ownership basis, and we're getting vessels -- ROVs on those vessels.

Got it. And does that have a geographic concentration within that independent grouping?

Well, on a construction side those vessels are mobile and go wherever the jobs are, so that really doesn't matter. I think that the two biggest areas still are the Gulf of Mexico and the North Sea and the call-out markets, and so --

On our website on vessel-based, we do disclose the distribution of our vessel-based ROVs. And as you will see, it will support exactly what Kevin said, Gulf of Mexico, Norway for the North Sea, and now you've got West Africa because of the four that we have on Angola, and other boats in field maintenance-type contracts. So I mean, those are the three main areas. And every now and then, we'll pick up an odd job for -- on a boat, and we've got a couple ROVs on a boat in Australia in long term contract. And we'll get some in Southeast Asia on periodic basis, but -- and we have some in Brazil. But I mean the geographic concentration is the three that we mentioned -- the North Sea, Gulf of Mexico and West Africa.

Got you. And everybody has picked around the Product side, but it would strike me that you usually get a pretty good pull-through on Products when they're working on these vessels. Can you outline maybe the top three that we should think about that are contributing to guidance, possibly in terms of what you may pull through when you're doing vessel work on the tooling side?

I'm sorry, I think you maybe answered your own question. The only thing that we really get pull-through on from vessel-based ROV is tooling, ROV tooling. I mean it's really hard to predict which tools are going to want for which specific IMR job or installation job. So I would just leave it generically with tooling.

And one last just to follow up, so would you say that the CapEx that you're spending on the tooling side is more in the traditional markets or expanding into new markets? And maybe some of the ones that seem to be more on the growth path?

We don't have -- let me just give a little bit more color. When we come up with a CapEx plan that we announce and we give guidance, and it is not so specific as for us to be able to categorize and characterize everything that we're going to spend during 2013. A lot of the tooling stuff particularly is short-cycle. It doesn't have a long lead time. So it really is dependent upon perceived or real need, and that's what we're going to be putting it. We are trying to expand our tooling geographically, and we've added tools in various locations. But it is impossible for me to answer that question any better because I don't know.

Fair enough. I appreciate the color. Thank you very much.

(Operator Instructions)

Brian Uhlmer.

Hello, how's it going? I wasn't expecting a question after 11.00, but I appreciate you sneaking me in. So I'll ask a real quick one on the ROVs. If I was just curious how we quantify ROV strength, when your guidance is that we're going to add less ROVs this year than we did in 2012, and what is the cause of that? And I apologize if you already discussed that because I hopped on a couple minutes late.

No, we didn't. We didn't discuss that, but when you talk about characterizing the difference between 30 to 35 and 37, you're getting pretty particular there. (laughter) So I'm going to say that I don't -- I mean it looks like pretty much like the other one.

I mean we add based on the demand, so we're not manufacturing in advance and having them sitting around. So I mean there are a lot of opportunities, particularly on the vessel side that come up in the short-term that we don't see in the beginning of the year. So this is our best estimate of a run rate and this could go up, could go down a couple. We just don't know.

We just think it's really early to tell whether it's going to be, 30 to 35 or 29 to 36. You know I mean --

I was hoping for a point estimate at the end of the year, so -- (laughter)

We were, too. Maybe we shouldn't have taken your call.

We were, too.

We'll follow up offline. I appreciate it, gentlemen, and good quarter. We'll talk soon. Thanks.

Presenters, at this time there are no further questions in queue. I turn the call back over to you.

Thank you. Okay, great, since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. We're very pleased with our record results for 2012, including our ninth consecutive year of record ROV operating income and anticipate producing another record year of EPS for 2013. We are anticipating a strong first quarter start in 2013 with EPS between $0.55 and $0.60 which at the midpoint will be up 22% over the first quarter of 2012. This concludes our fourth quarter and year-end 2012 conference call. Thanks and have a great day.

Ladies and gentlemen, thank you for your participation on today's conference call.