Oceaneering International Inc (OII) 2016 Q1 法說會逐字稿

Good morning my name is Kim and I will be your conference operator today. At this time, I'd like to welcome everyone to Oceaneering's first-quarter 2016 earnings conference call.

(Operator Instructions)

Suzanne Spera, Director of Investor Relations, you may begin your conference.

Thank you, Kim.

Good morning and welcome to the Oceaneering first-quarter 2016 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website. Joining us on the call are Kevin McEvoy, Chief Executive Officer who will be providing our prepared comments; Rod Larson, President; Alan Curtis, Chief Financial Officer; and Marvin Migura, Senior Vice President.

Before we begin, I would just like to remind participants that the statements we make during the course of this call regarding our future financial performance, 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. Our comments today also include non-GAAP financial measures, additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our first-quarter press release. We welcome your questions after the prepared statements.

I will now turn the call over to Kevin.

Good morning and thanks for joining the call today.

2016 is shaping up to be as challenging a year as we envisioned, possibly more so. Much has been written recently about Oceaneering's decision to break a long-standing tradition and not provide earnings guidance for 2016 or even for the first quarter. When we announced our decision, we indicated that this change was necessitated by a serious lack of visibility of near-term offshore activity levels.

So, that our first quarter is behind us, it's apparent how difficult it is to forecast the unknown or unpredictable. Consensus sell-side EPS estimates missed our actual EPS. However, first-quarter results from operations after adding back the impact of $5.9 million of foreign currency losses actually did not turn out much differently than when he had internally expected, with the exception of the disappointing advanced technologies performance.

As indicated in the earnings press release, we are pleased that each of our operating segments remained profitable and our EBITDA margin of 17% held up relatively well compared to others in our own full-year 2015 EBITDA margin of 20%. Reflecting the impact lower oil prices have had on oilfield spending levels, revenue for the first quarter was 23% lower than the corresponding period of 2015 and 16% lower than the immediately preceding quarter.

Year over year our quarterly earnings were down significantly as a result of lower demand and pricing for all of the oilfield services and products we offer. Sequentially, quarterly earnings declined due to a lower level of offshore activity resulting from further weakening market conditions, normal seasonality and higher unallocated expenses.

Normally first quarter has been our low-water mark for quarterly EPS driven by the seasonality in certain of our businesses. 2016 may not be a normal year by any standard.

Right now with continued low visibility we are projecting that our second-quarter results may be flat to slightly down relative to the first quarter as the expected seasonal uptick in offshore activity may be offset by the continuing slowdown in the overall level of CapEx and OpEx spending by our customers. The outcomes for the second quarter remains highly dependent upon the timing of projects that we have on the books and work we expect to be awarded.

With regard to the second half of 2016, our crystal ball is as hazy or cloudy as ever. We anticipate experiencing more of the same with a continuation of low off-shore activity levels as our customers continue to conserve cash by reducing CapEx and OpEx in this uncertain oil price environment. Meanwhile, we remain focused on reducing our cost structure consistent with our current demand profile while maintaining our market share to ensure that we're well-positioned when the offshore and subsea market cycle inevitably returns to growth mode.

Regarding our ROV segment, much depends upon the expected number of floating rigs working during the remainder of the year and on the level of vessel-based inspection, maintenance and repair, or IMR, activity undertaken. We are hopeful that the rate of decline of rigs going idle will start to flatten in the near future and that we will see an increase in OpEx spending to maintain Brownfield production through an increase in IMR activity.

The outlook for subsea products and subsea projects is more obscure than ever. We expect the first half of the year for subsea products to be better than the second half due to the carryover effect of higher-margin jobs into 2016 as evidenced by the 21% operating margin in the first quarter.

For subsea projects, we know the impact that determination of the Oceanteam Bourbon 101 in Angola will have on our subsea projects results, but, offsetting this event, we are expecting some seasonable increase in Gulf of Mexico IMR call-out work and a reduction of our vessel-fixed costs when the Olympic Intervention IV charter obligation expires in July.

We are expecting to see an improvement in the operating results for asset integrity and advanced technologies. For asset integrity, we anticipate an uptick in inspection spending. For advanced technologies, we expect better execution on theme park projects and increased activity.

I would now like review our operations by segment. Year-over-year ROV operating income declined 57% on 33% less revenue due to a 28% decrease in days-on-hire for drill support and vessel-based services and a 7% reduction in revenue per day on hire, mainly due to lower pricing. In light of the current challenging pricing and utilization environment, we are not disappointed with the 18% operating margin for the first quarter when compared to the 24% operating margin for all of 2015.

Lower operating margins can be partially attributable to depreciation becoming a higher percentage of revenue during periods of lower utilization and pricing. In 2014, ROV depreciation and amortization equated to 14% of revenue.

In 2015, these non-cash costs were 18% of revenue. And in the first quarter of 2016 they represented 23% of revenue. If you add back the depreciation and amortization to our operating income, you will find that our ROV EBITDA margin for the first quarter compared reasonably well to the EBITDA margin for all of 2015.

Our fleet utilization rate during the quarter was 56% compared to 73% a year ago and 62% last quarter. During the quarter we put four new ROVs into service and retired one.

All of the added ROVs were necessary due to earlier contractual commitments. Three of the systems went to work in drill support service and one on board a vessel. At the end of March, we had 318 systems available for operation, down from 336 systems a year ago.

Our fleet mix during the quarter was 69% in drill support and 31% on vessel-based work, compared to a 71% and 29% mix a year ago and 66% and 34% last quarter. At the end of March, we had 121 ROVs on 110 contracted floating drilling rigs or 57% of the 193 floating rigs under contract.

This compares to having ROVs on 58% of the rigs contracted at the end of March 2015 and 55% at the end of December 2015. 29 of the 110 rigs with our ROVs on board at the end of March have contract terms expiring during the balance of this year. The future work prospects of these rigs continue to be questionable.

Turning to subsea products, operating income year over year decreased 19% on a 19% decline in revenue, most notably a substantial reduction in demand and pricing for tooling and IWOCS services. Subsea products operating margin of 21% was flat compared to the first quarter of 2015 and was a function of executing backlog orders priced prior to the significant downturn in the industry. We expect margins to weaken throughout the year as we process backlog that more closely reflects the current market environment.

Our subsea products backlog at quarter end was $576 million, down $76 million from December 2015. The backlog decline was related to umbilicals and tooling. Our products book-to-bill ratio for the trailing 12 months was 0.77.

For subsea projects, our operating income dropped year over year mainly due to lower deep-water vessel demand and pricing, the dry-dock on the Ocean Alliance from regulatory inspection and low demand for our survey services. Asset integrity revenue continued to fall year over year and sequentially as our customers continued to defer CapEx and OpEx projects whenever possible.

Year over year our revenue declined $29 million with the majority of this reduction occurring in the UK and Norway. Advanced technologies operating income was lower year over year due to completing certain commercial programs and other theme park projects at low margins on previously discussed execution and contracting issues.

Moving to unallocated expenses, year over year they decreased due to lower accruals related to our incentive plans and ongoing cost reduction initiatives. Our unallocated expenses are expected to be flat, plus or minus 10%, quarter to quarter until we can have a better handle on the cost savings coming from our shared services initiative and our 2016 incentive plan cost expectations.

In summary, our first-quarter performance did not vary substantially from our internal expectations. Our liquidity remained strong as we generated $102 million in EBITDA and we ended the quarter with $371 million in cash and $500 million available under our revolving credit facility. Approximately $300 million of the cash on our balance sheet and March 31, 2016 was in the United States.

During the first quarter, we were in a group of 69 oilfield companies that Moody's placed on ratings review for downgrade. In March, Moody's announced a change in our rating from BAAII to BAAIII, with a stable outlook which is a downgrade of one level but still considered investment grade.

Capital expenditures for the quarter totaled $21 million, most of which was invested in our ROV and subsea projects segments. Our organic capital expenditure estimate for this year has been reduced to a range of $125 million to $175 million and the estimate includes $65 million in maintenance capital and some uncompleted project CapEx carried over from 2015.

We continue to expect delivery of our Jones Act compliant multiservice support vessel, The Ocean Evolution late in the year. With the completion of this vessel and several other carried-over projects, we envision our 2017 CapEx could be considerably lower than our 2016 estimate.

During the first quarter, we paid $26 million in cash dividends and yesterday our board maintained our current dividend rate and declared a $0.27 per share dividend to be paid during the second quarter. On a macro basis, we were encouraged to see the apparent signs of a bottom to oil prices in the first quarter. Only time will tell if this is a head fake or not.

In looking at leading indicators, worldwide demand is still projected to increase this year and production appears to be in decline. Bringing the supply demand equation more in balance which is good for medium and long-term industry fundamentals.

Longer term, deepwater is still expected to continue to play a critical role in the global supply growth required to replace depletion and meet projected demand. Deepwater projects remain key long-term elements within both national and international oil company portfolios.

In conclusion, in spite of the challenging market environment, we continue to believe that our liquidity in cash-generating capability, will enable Oceaneering to maintain market position and be ready for the inevitable market recovery.

Thank you very much. We'll now be happy to take any questions.

(Operator Instructions)

And your first question comes from Kurt Hallead with RBC.

Great job in a challenging market, managing through the best that you can in these dynamics. I was curious to note --

Thank you for noticing.

I was curious on subsea products you talked about dynamics in the back half of the year getting a little bit weaker as kind of pricing rolls through. As you continue to book backlog from 2016, do you get a sense of the pricing dynamics have stabilized for products yet?

I'd say we are expecting so little to be on the street, at least terms of umbilical orders, that we could expect some extremely fierce pricing competition for anything that comes to market. So no, I don't think it isn't done yet.

Maybe just also trying to gauge the dynamics on ROVs. You gave some very good information here in terms of the number of rigs that are coming off contract. And we all know there is very little visibility on it.

You talked about maintaining market share and a lot of times in other industry sectors a lot of investors will equate push for market share with aggressive pricing dynamics. And given your position in ROVs is that a necessary connection that you have to make between market share and pricing? Is there something different given your market share in ROV where you might not have to be so aggressive on price?

No, I think pricing is very aggressive. But as we pointed out on the last call, there's really not much coming to market right now so most of the price reductions are a reflection of discounts that are still aggressively being sought by our customers. And the lower margins reflected in the vessel part of the business, which is mark to market as we have always said.

Okay great. And one more thing if I may.

I think on the last call you indicated that the dividend decision at the board level could be predicated on your outlook for net income for the year. When I run through numbers, with your strong cash position and it looks like a very decent cash flow -- free cash flow dynamic 2016, to me it appears like you wouldn't have to do anything with the dividend if you so opted. Can you then help just understand, is the dividend absolutely tied in to your net income dynamic or do have some flex on that predicated on your cash position in free cash flow?

We have some flex on that. I think we were trying to give some color around that decision the last time but obviously we have some flexibility.

But as we also have said it is a board decision and we would just see how the year plays out here and also what other things may come into play for us for use of cash.

That's great color. I appreciate it.

And your next question comes from Waqar Syed with Goldman Sachs.

My question, first of all, they're saying that there's going to be a pretty heavy maintenance season coming up in the second and third quarters. Would you benefit from that?

A little bit. To the extent that we have ROVs on third-party vessels that are operating independently chasing the kind of work, yes. I guess the question really is how much of that really is there and I think Norway really needs to see some increase in demand in that regard for it to be noticeable in our results.

Are you also present on the UK's side or just mostly just Norway? Your asset integrity business is that on the UK side?

The asset integrity business is more heavily weighted to the UK's side. And the inspection part of it is more heavily weighted to refineries and utilities that maybe are running at high gear and aren't wanting to do maintenance but eventually that is going to have to happen.

On the subsea projects side if you go back historically there has been great variance in operating income year-over-year. As we look forward to 2016, what year do think is going to likely resemble, obviously it's not going to look like 2014 but are we looking at more like 2011 or 2012 were 2010? How would the operating income resemble?

I don't know how far you have to go to find a comparison. There are still a huge oversupply of vessels operating in the market that we are operating in and there's not enough work.

Margins are going to continue to be depressed until those dynamics change. And I can't tell you when that is going to happen. It really is revolving around again the callout nature of maintenance and repair work that gets carried out. I wouldn't expect any big change to happen overnight here in that market.

Waqar, this is Marvin. I think it's very difficult to go back to a comparable year because the whole dynamics of subsea projects changed when we went international with the BP contract. And even though we still have some India work and the BPB curtailed, I think it's almost impossible to come back and get apples to apples comparison of what we used to be like in the Gulf of Mexico for what year would be a best comparison.

Because we have more capable vessels. We have a more capable organization. It's just as Kevin said a very challenging vessel market right now.

In your margins in the first quarter were in the mid-single digits in the products business. Do you expect them to go into double digits as we get into the second and third quarters?

A lot will depend upon call at work. We do expect them to improve. We said The Ocean Alliance being drydocked and as you know is a double whammy because you have to expand for drydock and it just so happens to be one of our vessels on term contract.

If you're going to drydock a boat you hope it's one that's on the call-out market and not generating revenue every day. So it will be good to have that vessel back in operations and out of the drydock.

As Kevin said in July we will be able to -- the charter on The Ocean Intervention Four will expire. There is some flux in our fixed cost and I think margins should improve but so much is dependent upon how effective we are going to be and capturing the call-out work.

And your second vessel, you had three vessels at BP West Africa. One got released and the second one if I remember correctly is in May 2016?

Correct.

And the third want the contract expires in January 2017. Has BP started any discussions on extension of that contract or is it too early for that?

I would say that we fully expect that contract to be renewed.

We are in discussions, but there have been no decisions yet. We know that they can be pretty variable, but our expectations are we will be able to keep the boat in Angola.

They can't do without a boat let's put it that way. We are there and operating for several years so we certainly expect that that will continue.

In terms of subsea products, obviously the margins as you mentioned could come down as we go through the year. Could you ballpark that? What extent of margin erosion could occur there in that business line segment?

I don't think we are going to go, Waqar.

Okay, Sir. Thank you.

Your next question comes from the line of Blake Hutchinson with Howard Weil.

Understanding we don't want to deal with exacts in terms of the margin outlook for products. You've given us good information in terms of the composition of both backlog and the revenue stream in the past. As we think about it more qualitatively, is the bigger issue that you deal with throughout the year kind of under absorption, the umbilicals production side? Or really should we be thinking more towards the new pricing regime for both tooling and IWOCS and some of those major components?

It is more under absorption. As you appreciate their new FID's are few and far between so there's less and less to even chase, much less get and then execute. And then additionally, the call-out part of the business which can be substantial in good years for tooling and IWOCS just hasn't been there.

And as we continue to say it, tell me when the phone is going to ring? If I could, I would. So those are the two big pieces that are just pretty hard to predict right now.

Kevin, following on the commentary around tooling, do you observe a phenomenon in that market where you actually see peer ROV operators or maybe you've engaged in this yourself or you kind of under order tooling in this market? Or would you say this is simply a more of a one-to-one relationship with activity?

This is really activity. People don't quote unquote order the tooling so to speak. They have a problem and we go out and solve it using tooling.

And our combination of other products and services and that is generally higher-margin sort of activity. In today's market, A there's not very much of that going around and number two, since it's all vessel-based, all of that part of it, the preponderance of it is mark-to-market and much lower margins than you would see in a more active year.

You might remember that our tooling and IWOCS are mostly a rental business so it's very much a one-to-one activity level base.

You have to have it. Okay.

I just want to make sure we're thinking about this correctly too at these levels. Is the year own internal vessel-based usage of the ROVs starting to have a more of an impact than what we see quarterly? So we need to be thinking about those businesses moving a little more in tandem with the spot markets? Or would you say it's still somewhat immaterial to the ROV business as reported?

I think a spread rate includes everything. If prices are down, they are going to be down.

The ROV -- our own ROV rates on our vessels are pretty comparable to our ROV rates on other people's vessels out there on the marketplace because it's a spread rate at the end of the day. We'd be playing -- let's discount the boat price more so we can have a better price on the ROV.

We don't do it that way. It is a spread rate.

Blake, if you look at -- we have 318 ROVs and even at, to pick any number, pick the math, make the math easy, and pick 50% utilization and then you compare that to the number of ROVs that we have on our boats, it's inconsequential. It is very relevant to our projects business, but as to the ROV business, it is not significant.

That's what I was going for.

And your next question comes from the line of Vebs Vaishnav with Cowen.

I wanted to touch on the subsea products. If you go back let's say 2009 when they quarterly revenues were somewhere around $125 million. The margins dropped somewhere around low double-digits, low teens. Has there been any structural change in the business if we go back to same level of revenues that margins of would be materially different than what we saw than?

I'm not sure that that's really comparable even with the way the business has changed somewhat. If we go that far back I think we were at the head of the curb being able to provide ROVs on the demand and short-notice because we're --

Products, your question is about products right?

Yes, actually products.

I just think that so much has changed. We are really not prepared to be able to comment on the comparability of 2009 levels or margins. I don't have any of that handy.

And significant changes has been made in our product mix. Back in 2009, IWOCS and tooling were a relatively small part and it was mostly umbilicals and thermoplastic was a large market share.

Now all of that has been flip-flopped where thermoplastic is a very small portion. And we've always talked about the higher input costs and lower margins on steel tube umbilicals which are now predominantly the order of the day. So I think it's almost impossible to go back and do a meaningful variance explanation or analysis of 2009. (multiple speakers)

There's just a lot of differences.

That's helpful. That's the color I was looking for.

Number two, we touched upon the dividend. Earlier the commentary was, if net income is not more than the dividend you guys would revisit, but it sounds like now that language is more flexible. Just wanted to make sure that I got that correct?

I think the whole definition is revisited. I think when we take a look at our earnings expectations that is an element that we consider. But it wasn't meant to imply any rigidity.

So I think we are revisiting our dividend philosophy, the Board is, quarterly. I think that's what Kevin said and -- Q1 wasn't much different than what we expected. We will see what happens in Q2.

Very helpful. Thank you.

And your next question comes from the line of Igor Levi, Morgan Stanley

Going back to subsea products you talked about as backlog is converted it will reflect the current environment and you will see reduced margins. Now when I look back at my model in the past six quarters, every single quarter where we thought those margins could decline you proved us otherwise.

I was wondering first does the decline driven more by pricing or mix? And how likely is it or how possible is it that you guys can continue to execute so what that we will see another one or two quarters of flat margins despite the weak expectations?

I think the mix within the group really drove a lot of that. We had a pretty good utilization in our IWOCS business and our tooling business both, and those are much higher-margin services that we provide.

Those are not really in the mix at this moment. We are certainly hoping that we will see some uptick in Q2, Q3. But until it happens, it hasn't happened.

Its being much more leveraged to the umbilical product business with a lower margin and as we shift to execution of projects that were bid in the current downturn environment, I think that will come out. Unless it happens to get offset by increased activity levels which were not seeing at the moment.

Got it. On the pricing side, how severe is the pricing pressure in the different product lines? Is that something you are able to touch on?

On the umbilical side, even when times when we thought we were really, really good, we always pointed out that there is twice the manufacturing capacity in the industry as there is demand. That's what I was really, really good. Well now, it is not so good.

When you're looking at trying to just get some kind of recovery on your fixed costs you can expect pricing gets to be pretty challenging. On IWOCS and tooling, that tends to hold up a little bit better. It is certainly not as good as what it was.

And it depends on what the project is in the mix of what else is in it as to how good those margins might be. So while we can't tell you, we do try to focus in the areas that we have the best market reputation or whatever to do the higher degree of difficulty jobs requiring higher levels of engineering and whatnot to plan and execute.

And generally you can be better off in those parts then on the more commodity stuff. But what's going to fall out of the sky, who knows.

One thing we need to remember about umbilical margins regarding pricing is what we commented earlier about absorption. It really depends upon, if you can get this level of pricing but keep your plant fully loaded, the margins are acceptable. It is at this level of pricing and less than optimal throughput because of backlog shrinkage that is when you really start to see a degradation in margin.

Great. On the order side, what type of orders -- or what type of mix of orders are you seeing as of late with just over $100 million in orders, I think you had in the first quarter. Is it more geared towards umbilicals or is it a wide range of products?

It's a wide range.

When we say the backlog decline was in the backlog decline was attributable to the umbilical throughput and tooling. So the $100 million that got us to the point of 0.77 book-to-bill was included all services or products -- I'm sorry all products within the product lines, within the segment is what I meant to say.

Great. Just one last one on ROVs, I talked about continued pricing pressure. This quarter revenue per day compared to last quarter was relatively flat.

We saw something like that in the second quarter of 2015 before the decline resumes. Do we expect a repeat or are we seeing any kind of deceleration in the pace of day-rate declines?

I would say no change. There is still steady pressure. Our inboxes are still full of requests for lower prices and it just depends upon how successful we'll be in navigating that.

Great. Thank you.

And your next question comes from the line of David Smith, Heikkinen Energy.

I wanted to ask in normal markets when do start to develop this ability on how the seasonally strong Gulf of Mexico IMR market will shape up? Or maybe the question is when does that seasonal shift begin to happen? Which month do we start to transition from a softer 1Q to a stronger 2Q?

Usually you start seeing, May timeframe. It really depends on what the weather pattern is for a given year. If it's been really bad then they'll tend to delay things, if they can. So that's generally around the timeframe, mid to end of May.

Is there anything different on the visibility this year compared to last year?

At this point, I would say no.

I appreciate that. On the projects I was wondering if you could give us a sense of the margin impact that The Ocean Alliance drydock had on 1Q results? I know you mentioned the double whammy as revenue and costs but didn't know if you could help give us a sense of what that --

That is the best we can do. That's it. Sorry.

I appreciate it. Had to ask.

Also curious thinking about potential uses of cash. If you see the potential for vessel valuations to become distressed enough to raise your interest in maybe adding to Oceaneering's permanent fleet.

I would say, no. I can't get interested in -- there are so many boats available that I don't see that as being anything strategic that would be helpful for us.

Should we get to needing another vessel, we would again do our traditional analysis of lease versus buy and commensurate with vessel values coming down, so are lease rates.

We saw in the rig market that you can hardly get prices lowest enough to get anyone interested I was just curious if the MPS free market looked any different. I will wrap up with a little more positive question.

I wanted to say congratulations on being recognized the OTC for the remote piloting and automated control technology. I was curious on you have seen from customer interest or maybe how you think about the timeline or ability for that technology to help preserve or gain market share in the vessel-based ROV market.

First of all, thanks for even noticing that we were selected for a Spotlight on technology awarded OTC again this year. I think that -- we don't sell our ROVs.

We provide the service and so this is something that we will gradually upgrade our existing ROVs probably starting with our vessel-based ROVs to be able to this. So it's not a question of selling it. Say, we'll provide this enhanced service capability if you give us more for the ROV, I don't think it works that way.

We'll just continue to hopefully demonstrate superior performance and execution in that business. And that will give us -- keep us in the market share and whenever the pricing does start to recover, we will to be able to demand our appropriate share then.

Appreciate it. Thanks.

And your next question comes from the line of Ken Sill with Seaport Global Securities.

I find it refreshing to talk about earnings -- positive earnings like everyone else here. It's a unique things these days.

On the product, subsea products side, I guess I'm trying to get a better feel. The IWOCS, the tooling, are higher-margins, it seems like that was probably what was down the most between Q4 and Q1 on the revenue side of products. Is that fair to say?

Tooling was down primarily? (multiple speakers)

IWOCS. (multiple speakers) Yes, correct.

Just looking at the backlog. Is there an oil price threshold that would see more tooling and IWOCS work come back? The subsea deepwater well intervention market's been one that's been talked about for 15 years.

You have a lot of cheap vessels that can go do it now. I am just wondering if you think there is an oil price that would stimulate demand for more of the subsea products?

I think once things are in production its not about the oil price, it's about the marginal cost to improve production volumes if they have some issues that they could fix. Clearly, if they are shut in for some reason they are going to spend the money to go correct that problem.

I think the oil price, if you take away the issue of, do we have enough cash to spend on doing something in a production scenario, if there's something that they can do to improve that, they will generally do it.

I think it's going to be -- we don't have an oil price in mind but I think it's going to be whatever price is necessary for them to start spending more OpEx budgets. I think that's what were talking about. That with the stabilization in oil price and a little bit higher oil price, we could see a pickup in vessel activity in Brownfield bringing on this kind of stuff and that would require more tooling and IWOCS.

But it has opposed to just the emergency fix work. We could see production enhancement if the price was right and so but I don't know we don't have a particular price in mind.

That is probably dependent on or particular to each company what their cash flow position is and what their other needs are.

That's fair enough. It seems like that should be a growing business over time. Right now it is tough.

Moving on to advanced technologies. That was pretty weak relative to my expectations anyway. How do think that, you guys are saying it's going to get better and the back half of the year on better execution. Is there going to be much of a change sequentially there, between Q1 and Q2?

I don't know what I can say sequentially. I think we were struggling with a couple of problem jobs all through the year including into the fourth-quarter. And those are really behind us now and so that's why we are expecting better improvement.

As far as the timing of the projects that we have on the books for this year and when you will see that in our results -- not sure.

Ken, Q2 should be a transition quarter and then the second have should be the better run rate.

And your next question comes from the line of Ian Macpherson, with Simmons.

A lot of thoughtful questions preceding me so I am down to prosaic ones. I wanted to clarify the Q2 guidance for flat to down versus Q1 should we comp that off of your $0.26 GAAP EPS or should we add back foreign currency headwinds for the comparable benchmark?

Yes. (laughter)

Tell me what foreign currency is going to do and I will tell you the answer. We were talking about from operations being --

Before FX.

Okay. Got it.

I know they're still providing that -- struck me with Q1 results was sequentially flat ROV average price per day. Your mix has been shifting as the market's gone down. I think you having consistently a higher mix of drill support as we've gone down. Is that positively influencing your average daily revenues on ROVs and is that a trend that you think is going to continuously play out through the year that will be a buffer or is that not a correct read?

I think given the impairment in the vessel-based part of the market right now is pretty hard to make a snappy comment about that. Clearly, the rig business is what it is.

The vessel part of the market is oversubscribed and margins are not great. But on a day-rate basis, we certainly hope that we are near the end of the price reduction asked by operators and that will certainly that we stabilize within the next quarter or so and then move on from there.

Ian, traditionally it would be going the other way around because of vessel-based services when you get the days have a much larger crude component. And therefore you would have a higher average revenue per day work.

I think that's where he was headed. (multiple speakers)

So, the mix is, what I guess is surprising, that the vessel-based days are going down more than commensurate with drill support days and that's why the mix has been up. Now that is really Q1 and we've got to wait to see when we get to a more seasonally active vessel-base period to see what happens in our mix in Q2 and Q3.

We could see that turning back around to having an increase in vessel days versus a decrease in rig days but as we said a lot depends upon the rig renewal rates and all things. So, I think it's too early to give a clear direction in that silver lining.

Fair enough. I understand it is complicated. Thanks a lot.

And your next question comes from the line of Mike Urban, Deutsche Bank

I was wondering if in any of your business lines given the market we have out there, are you seeing any competitors with any kind of irrational behavior on activity or pricing or maybe it's completely rational given the way the market is, that maybe a better way to put it is, unsustainable?

I do think it's pretty rational from their point of view. Whether you have a boat that needs to get some contribution to the fixed cost of the charter or the CapEx or manufacturing plant that needs some work to offset your fixed costs there. That causes you to price whatever you need to keep things going. And so, I think it is rational and -- the second part of your?

I would actually agree it is probably rational but is it sustainable? Are there any parts of the market where people are pricing below what you think costs are?

I think in the vessel-based side, you can see that it is not sustainable for some folks. I think the same is true on the floating rigs side.

If you are over leveraged in the rest of it, then it is not sustainable for the long-term and those are the ones that are going to fall out. The question is, who picks up those assets and then how many pennies on the dollar to come back and try to compete when the market starts to pick up. Who knows what will happen there.

But I do think that it's been written about, the strong companies trying to get stronger. I think that with a good track record of execution, safety, good engineering content, et cetera, I think that we will maintain our market position as a quality company to go to for work when the market gets better. I think -- I would expect that operators begin to be maybe a little more focused on the risk of getting things done and not having issues and so that should help the top-tier companies as well.

Going back to the ROV business and understanding the lack of visibility there, was your exit rate on utilization and pricing materially lower than the average that you afforded in the first quarter?

Year-over-year?

(multiple speakers) Exit rate of the quarter versus the average?

Mike, I don't know. I don't think so.

We should think about the traditional metrics, look at rig drilling off contract and then it becomes against the renewal and then vessels as you said earlier. Who knows, it depends on other factors.

Generally the direction is lower. But I can't comment on the exit rate versus the average. I just don't have that -- we don't talk too much about month to month.

And your next question comes from the line of Matthew Marietta, Stephens.

Congrats on the cash flows. I think obviously the CapEx there was a little bit less than I anticipated, but I wanted to dig into subsea products a little bit.

I'm hoping to get some color on the burn rate and what it may look like going forward. You've reiterated numerous times backlog build numbers was being brought into backlog. There's really no visibility there. Tooling being unpredictable, umbilicals margin erosion.

But can you help us a little bit with the burn rate and what you can do there to manage the burn rate of the backlog? Went back over and looked over numerous quarters and it's rare to see a sub-third burn rate for the Company. I'm trying to understand what the delivery times are looking like, if supply chains or customers are willing to accept slow returns. Just help us understand some of the things that you can't control and what you're seeing there.

I don't know that we can help much there. All of these particularly umbilical orders are project-based and it's not like the boat only construction that you hope can get delivered later because you don't want to pay for it now.

These are all projects that are going to come together at a certain point in time and they are really meeting the delivery for the time they originally ordered it to be delivered. We work through on a project basis each one of those orders to deliver them at the time that we promised. And we don't really -- if you want to use the term manage the back-long burn, it is managing executing the project to the schedule that we've committed to.

I guess it's more in the previous questions on the mix and it being consistent. It's more on the mix of what's in backlog that's going to dictate what that burn rate fluctuation will be. And is there any reason to think that what you did in Q1 is going to be materially different from the rest of the year?

As you said, it depends on, not only -- I mean from an umbilical standpoint which is where most, almost all of the backlog is umbilicals, first of all. So that will depend within those discrete orders where we are in the production phase of that particular project.

And that's how that gets reflected in our results. One quarter may or may not be reflective of what you see the next quarter. It really is dependent on too many things.

Could you maybe help us if there are any quarters where you have that visibility and when those projects are needing the umbilicals. Is there any lumps in the future quarters that we should consider as we tried to get inside of you all's internal crystal ball here?

No. Remember that the orders may be lumpy but since we use percentage of completion accounting as we progress an order, that tends to have a more of a smoothing effect. I think the lumpiness of the business. (multiple speakers)

The order, which dictates your backlog.

And the cost absorption.

Got it. Okay.

I want to go back to the dividend. Based on the conversations I've had so far I get asked a lot is the dividend safe. I guess your color last quarter was helpful.

But given the outlook for flat to slightly down, I guess I wonder why not just trim the dividend and remove the concern and give yourself some breathing room on the payout ratio rather than explore the leveraging. I guess getting back to that same line of questioning. Is there a situation where the dividend may be trimmed and not removed outright, obviously highlighting the optionality that you guys have?

Matt, I had the same thought today if everybody is thinking were going to cut it why don't we just cut it, but that's not the way we look at it. We said we considered all the variables. Our balance sheet in a strong cash position. Our earnings forecast and then at the end it's a board decision.

So I don't have the authority to make that decision. But if I did, I would give some serious consideration to what you said. But it is not up to me.

And I think we're just going to not give any more color on it. We have a lot of flexibility. We will see what next quarter brings.

Another question that all of us get here is on ROV rates. Where are we in the spot versus what is still being pulled through on what could be backlog on the ROV side?

Any help that you can provide there? How do you balance market share defense with a day rates there? And maybe help us understand, is there effective revenue per day coming through that's under contract and how does that really reflect, versus the spot market and I know you can't be too specific?

I think if you think about the rig market first of all, we have said that we are going to do everything we can to maintain our market share. And that is a pricing idea in this current market.

And so we'll do whatever we think is necessary without being imprudent to maintain our position on rigs that are working and or warm stack with an opportunity to go to work sometime in the reasonable future. Again, leaving the system on a rig is a little bit better than leaving it in a yard someplace so if we have a choice we will leave it on the rig.

On the vessel side, it's a bit less predictable. I don't think I can really do any better than that.

I think there's very little left in backlog that hasn't been adjusted somewhat. (multiple speakers)

That's very helpful. Is there a similar dynamic in which your customer base is asking for some concessions and maybe helping you guys with the relationship or is that a fair way to think about that?

Well, there are some customers where we have those kind of discussions. I don't think there's anything there that you can plug into a model.

Thanks.

Every day is a new day.

And your next question comes from the line of Haithum Nokta, with Clarksons.

A lot of questions today on subsea products I won't belabor that just taking a step back, Q1 is usually seasonally weak quarter. You talked about Q2 being flat to down. And the limited visibility in rig contracts going forward as well as the vessel coming off of BP in Brazil or Angola. Is it possible that Q1 ends up being among the strongest quarters in 2016 in your mind?

Well, is it possible? Yes. Am I thinking about it that way? No, because I choose not to. (laughter)

I am certainly looking for hopefully some sort of uptick in the market in Q2, Q3.

Fair enough. I apologize if I missed this. Is the Ocean Evolution still planned to be delivered at the end of 2016? Or has that been delayed?

No, end of 2016.

And your final question comes from the line of Eric Voight with Guggenheim.

(inaudible) integrity business. What sense do you have or how close you are getting up to the regulatory requirements where you will have to start spending here again?

All of these things are staggered both within the asset portfolios of the companies and then across the different companies themselves. I think I made a comment earlier about refineries in utility operations and in the UK, where we have a fairly high concentration.

But when times are good they are running those things flat-out and they are not going to bring them down for maintenance which would be the window of opportunity for us to go in and do inspection work until they absolutely have to because they are making money while the sunshine is there.

As far as the offshore part of it, I think we noted in previous calls that we've been surprised that particularly in Norway and in North Sea that there was such a reduction and in some cases just total cessation of inspection programs there. Our expectation is that at some point they are going to have to get with a plan again and start going. But we're still waiting to see that happen.

Makes sense. Thank you.

There are no further questions at this time. I would like to turn the call back over to the presenters.

Thank you. Since there are no more questions I would like to wrap up by thanking everyone for joining the call.

This concludes our first-quarter 2016 earnings conference call. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.