Oceaneering International, Inc.
Q4 2022 Earnings Call Transcript

Published: 24 Feb 2023

[Operator:]

Good morning. My name is Joanna, and I will be your conference operator. Welcome, everyone to Oceaneering's Fourth Quarter and Full-Year 2022 Earnings Conference Call. [Operator Instructions] There will be a question-and-answer period after the speakers’ remarks. With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Development and Investor Relations. Please go ahead.

[Mark Peterson:]

Thank you, Joanna. Good morning, and welcome, everyone, to Oceaneering's fourth quarter and full-year 2022 earnings conference call. Today's call is being webcast, and a replay will be available on Oceaneering's website. With me on the call today are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments; Alan Curtis, Senior Vice President and Chief Financial Officer; and Wit LeBlanc, Vice President and Chief Accounting Officer. Before we begin, I would like to remind participants that 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 fourth quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

[Rod Larson:]

Hey, good morning, and thanks for joining the call today. 2022 marked our fourth consecutive year of improved adjusted EBITDA performance. In our offshore energy markets, the year unfolded generally as we expected, with seasonally lower activity levels and increased preparation costs during the first-half of the year, progressing into higher activity levels and increased margins during the second-half of the year. Our consolidated adjusted EBITDA of $233 million was above the midpoint of our guidance range and year-over-year adjusted EBITDA growth was led by significant improvements in our Subsea Robotics or SSR and Offshore Projects Group, OPG segment results. We delivered $121 million of cash flow from operations, spent $81 million on capital expenditures and increased our cash position by $30.6 million to $569 million on December 31, 2022. We are encouraged by our strong order intake during the second-half of 2022, improving pricing and expanding sales pipeline. We expect these positive fundamentals to drive improved financial performance in 2023. Today, I will focus my comments on our performance for the fourth quarter and full-year of 2022, our market outlook for 2023, Oceaneering's consolidated 2023 outlook, including our expectation to generate positive free cash flow in the range of $75 million to $125 million and EBITDA in the range of $260 million to $310 million and our segment outlook for the first quarter and full year of 2023. Now moving to our results. For the fourth quarter of 2022, we reported net income of $23.1 million or $0.23 per share. These results include the impact of $0.2 million of pretax adjustments associated with foreign exchange losses and negative $16.6 million of discrete tax adjustments primarily due to changes in valuation allowances and certain adjustments to prior year taxes. Adjusted net income was $6.4 million or $0.06 per share. Consolidated revenue of $536 million was 4% lower than in the third quarter, with revenue increases in our manufactured products and Aerospace and Defense Technologies or AdTech segments, being more than offset by revenue decreases in our other operating segments, particularly OPG. Fourth quarter 2022 consolidated operating income of $42.2 million was 10% lower than in the third quarter on a typical seasonal decline in activity in our offshore segments. Our consolidated adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA of $70 million was above the midpoint of our implied guidance range provided at the beginning of the fourth quarter and was slightly higher than consensus estimates. And for clarity, the potential product sale in our entertainment business did not occur. Although we experienced typical seasonality, it is worth noting that the combined revenue and adjusted EBITDA levels in our SSR and OPG segments during the fourth quarter of 2022 were significantly greater than the corresponding quarter in 2021. We see this as a positive indicator for prospects in our energy businesses in 2023. Our fourth quarter 2022 results also included accrual releases resulting from more efficient personnel and inventory management initiatives that occurred throughout the year and primarily benefited our SSR and Integrity Management and Digital Solutions segments. We generated $159 million of cash from operating activities and after deducting $25.9 million of capital expenditures, our free cash flow was a strong $134 million for the quarter. Good operating cash flow, working capital efficiencies and capital expenditure discipline allowed us to increase our cash position by $141 million during the fourth quarter of 2022. As of December 31, 2022, our cash balance stood at $569 million. Now let's look at our business operations by segment for the fourth quarter of 2022. SSR operating income improved sequentially, despite marginally lower revenue. Activity levels in our remotely operated vehicle, ROV, tooling and survey businesses were generally consistent with expectations. As mentioned, SSR's results included accrual adjustments resulting from personnel and inventory efficiencies recognized in the fourth quarter. These reserves and accruals remain throughout the year and the adjustments resulted from reconciliations performed in the fourth quarter. As a result, SSR EBITDA margin of 35% during the fourth quarter was above the 31% achieved during the third quarter of 2022. Without the benefit of these releases, SSR's fourth quarter 2022 EBITDA margin would have been relatively consistent with the margin achieved in the prior quarter. The SSR revenue split was 77% from our ROV business and 23% from our combined tooling and survey businesses, the same as in the immediate prior quarter. Fourth quarter 2022 ROV days on hire were 14,350 or 7% lower, as compared to 15,408 in the third quarter with all the decline coming from vessel-based days as a result of seasonality. Our fleet use during the quarter was 65% in drill support and 35% in vessel-based services, compared to 60% and 40%, respectively, during the third quarter. Fleet utilization declined to 62% in the fourth quarter from 67% in the third quarter of 2022. Fourth quarter 2022 average ROV revenue per day on hire of $8,967 was 6% higher than in the third quarter of 2022. We ended the quarter and the year just as we began with a fleet count of 250 ROV systems. During the fourth quarter, we retired three systems and added three systems to our fleet. At the end of December, we had ROV contracts on 83 of the 141 floating rigs under contract or 59%, the same percentage as on September 30, 2022, when we had ROV contracts on 82 of the 140 floating rigs under contract. Turning to Manufactured Products. Our fourth quarter revenue of $100 million was 7% higher than in the third quarter of 2022. Operating income of $6.1 million and operating income margin of 6% were higher sequentially due to a favorable project mix. Bidding activity was robust in our energy-focused businesses during the fourth quarter, and we are excited to see increasing interest in our Mobility Solutions businesses as evidenced by our recently announced contracts for 85 MaxMover autonomous counterbalance forklifts to be delivered in 2023 and 2024. Our manufactured products backlog on December 31, 2022, was $467 million, a strong increase over our September 30, 2022 backlog of $365 million. Our book-to-bill ratio was 1.39 for the full-year of 2022, as compared with the trailing 12-month book-to-bill of 1.08 on September 30, 2022. OPG fourth quarter 2022 operating income declined on lower revenue. Revenue was 20% lower primarily due to seasonality in the Gulf of Mexico or GoM. Fourth quarter 2022 operating income margin of 9% declined from 13% achieved in the third quarter of 2022. This decline was due to lower-than-anticipated vessel utilization resulting from project schedules shifting into mid-2023 and higher-than-expected vessel demobilization expenses. For IMDS, fourth quarter 2022 operating income improved sequentially on 5% lower revenue. Operating income margin for the fourth quarter improved to 9% from 5% in the third quarter of 2022. The margin improvement was largely due to contract repricing and the benefit associated with efficient personnel management in the year. Our Ad Tech fourth quarter operating income declined from the third quarter of 2022 on a 7% increase in revenue. AdTech operating income margin declined as expected to 11% due to changes in project mix. Fourth quarter 2022 unallocated expenses of $33.6 million were sequentially higher due to a combination of increased accruals for long-term performance-based compensation and increased information technology costs. Now I'll turn my focus to our year-over-year results for 2022, compared to 2021. For the year, consolidated operating income improved sequentially on higher revenue, as compared to 2021, consolidated adjusted operating income. 2022's improved results were primarily due to positive energy markets that spurred increased offshore activity in our SSR and OPG segments, which realized improved pricing and increased utilization in the second half of the year. Impacts from the U.S. government's continuing resolution in the early part of 2022, resulted in lower revenue and lower operating income from our AdTech segment. Compared to 2021, our 2022 consolidated revenue increased 11% to $2.1 billion, with revenue growth in our OPG, SSR and Manufactured Products segments being partially offset by revenue declines in our IMDS and AdTech segments. Consolidated 2022 adjusted operating income of $111 million and adjusted EBITDA of $233 million improved by $38.8 million and $22 million, respectively, with significant gains in our SSR and OPG segments being partially offset by declines in our AdTech, IMDS and Manufactured Products segments. We generated $121 million in cash provided from operations and invested $81 million in capital expenditures. For the full year of 2022, we generated $39.8 million of free cash flow and increased our cash balance by $30.6 million to $569 million. We are pleased with notable achievements accomplished during 2022, including the following

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Kurt Hallead at Benchmark. Please go ahead.

[Kurt Hallead:]

Hey, good morning, guys.

[Rod Larson:]

Good morning, Kurt.

[Kurt Hallead:]

Hey, it’s a great recap. I think some of the ROV dynamics are kind of starting to gain some momentum. As you mentioned, offshore rig rates tend to be a really good leading indicator for the ROV rates. And it seems like what you said, we have 44 ROVs that are set to reprice I guess, sometime here in 2023. So I guess, a kind of a leading question here. The last time also rig rates were over $400,000 a day. ROV rates were somewhere between $10,000 to $12,000 a day. That'd be up about 25%, 30% from what you did in the fourth quarter. So are you getting any pushback at all? Do you see an opportunity to kind of get similar pricing mid-cycle? Just kind of get a sense of how you see things and whether they -- the dynamics between the rig rates and ROV rates have changed at all.

[Rod Larson:]

Yes. So there's always pushback. I mean -- but I will say this. As we reprice, we are seeing -- we've seen some very -- and I'll be careful, I'd say some very isolated incidents where we are starting to see that 2014 pricing. So I think that's directionally correct. I think that over time, as we reprice, we'll be able to see some of those rates and those things that generally happen in the markets that are most difficult to serve where we do a great job. So depending on where they come, I think we can start bumping up against those rates, again, it's just going to be getting a greater percentage of the fleet repriced.

[Kurt Hallead:]

Okay. That's fair enough. I guess, the second element of my question is kind of on the Manufactured Product side. Initially here, just trying to get a sense on what you think is within your control as a company, to kind of drive margins above and beyond kind of that single-digit kind of range that you referenced. And are there things that you can absolutely do here in 2023 that could provide some upside to that?

[Rod Larson:]

I'll start a little bit, and then I'll let Alan jump in because that's his home. That's where he came from before this job. But I would say pricing is still the major opportunity here because while there are some efficiencies gained, we still have a large amount of commodity price built into the construction of the umbilical products, in general, thinking about steel tube and copper. So we're just going to have to keep driving price, we see that the capacity is starting to get more constrained at the umbilical plants. So we're going to have to -- we're going to have to be confident that if we want to get the customers the delivery times they want and keep those slots open for them so that they can get their projects done, there will be a willingness to pay for that. Alan, anything on the cost side or that you'd add?

[Alan Curtis:]

No. I think I would add is -- I would look at it as margin improvement will be probably more seen in ‘24 and ‘25. In ‘23, we have a little bit of a mix shift in some of the products and services that we're offering that we expect revenue on this year versus last year. So we had some higher-margin work that actually went through last year, revenues we recognized and then some of the work that we're doing this year was priced in a little bit more competitive environment. And then as we look at the plants filling up, we think there's room to move price here that will benefit ‘24 and ‘25. So we do expect margin progression, but being a long-cycle business, it may take a little bit longer to flow through.

[Rod Larson:]

Then, and the good news there is that most everything is booked through 2023. So when Alan says that what we're booking now is the work we're talking about for 2024.

[Kurt Hallead:]

Okay. That's great. And then lastly, can you give us an update on how you're going to generate another year of positive free cash flow and you got some debt coming due here in a couple of years. So what's your plan for use of cash or excess cash, I should say?

[Alan Curtis:]

Well, I think, Kurt, when we look at it is we gave guidance range here of $75 million to $125 million on free cash flow. And we -- what we do is we looked at over the last three years, and it tends to be a little bit lumpy with us. I mean I looked at 2021, we generated 82% free cash flow conversion. Last year is certainly a lower year in ‘22 than we were driving towards coming in at $40 million. But over a cycle, over a period of years, we've been averaging somewhere in the 35% to 36% range. And that's where we've set the target for this year. Do we expect we can possibly overdrive that? Yes. That's what we're looking to do. We had some inventory that we procured here at the end of 2022 for work that we had already secured going into 2023. So some of it was the supply chain concerns over will we get the materials in time or not. So we did order the materials. They came in a little bit faster than we anticipated, which pulled down a little bit of the ‘22 story. We think that could be a positive uplift here in ‘23 as well. So we're excited about what we can drive on free cash flow this year. We do expect -- while we gave the range, we're targeting $100 million plus. So I know that was a note several people put out, but our eyes are still set at the same level they were last time we talked.

[Rod Larson:]

And I'm going to talk a -- Kurt, let me hit the other side of that a little bit because the other one is what are you going to spend the money on and what are your capital deployment? And I can't help but bang the drum when I get a chance here is that we've got some really exciting things on the upside. We've got the freedom that's coming out now, and that's going to be going commercial and our ability to expand that fleet with demand. The MaxMovers, 85 MaxMovers, this is a pretty exciting product. I don't know that everybody quite understand, it's way more than a counterbalanced forklift. If I think about the difference between a regular car and a Tesla, this is a much bigger difference than a regular counterbalance forklift in an autonomous forklift. And the customers are excited. They're pinched for personnel to drive forklifts, and it's -- they are looking for a way to automate their plants. So big machines. We're excited. 85 is a good number to start, but we're excited that to be even bigger numbers in the future. So where we will deploy capital is going to be on sort of what I would call the front end of the business. Those new opportunities that we think are in high-growth markets. So they're going to go fast. And I don't want somebody to think that we're going to miss opportunities for those kinds of things when they come available.

[Alan Curtis:]

Yes. And I think maybe we haven't really been able to speak much about these. We were always kind of alluding to the growth element here. As Rod said, these aren't your traditional forklift. These go for, let's just call it, $200,000 to $275,000 per unit, depending on how it's fitted out and all the accessories. So that might help give a little bit of context to the value of these.

[Kurt Hallead:]

Okay, great. Appreciate it. Thank you.

[Rod Larson:]

Thanks, Kurt.

[Operator:]

Thank you. Next question comes from Eddie Kim at Barclays. Please go ahead.

[Eddie Kim:]

Hi, good morning. Just following up on Kurt's question on ROV. So day rates have clearly moved higher, and it sounds like they're going to continue to move higher this year. But your total ROV fleet count as it makes pretty flat at 250 systems for the past three years now. And I know there have been a few additions and retirements every quarter, but the net number has stayed very consistent. So my question is, is there a certain day rate or utilization threshold at which you would consider net additions to your ROV fleet? Or is the plan to just take disciplined here and really just being a harvest mode on the fleet you have currently?

[Rod Larson:]

Man, we're going to be pretty disciplined. Here's the way I would put it, I think when we get the 70% to 75%, that's when you start to say, you really can't squeeze more out of the existing fleet. So you really have to look at what additional opportunities are out there that you would consider doing a fleet expansion for. I would tell you that the things that I would get excited about are more ISRS where we know that we're building a differentiated product that's disruptive. Maybe that's a chance for us to put something more in the market. But I'm just not excited about more of the same. I think we're going to be very careful about understanding how we would deploy any additional assets.

[Alan Curtis:]

Yes. So Eddie, I want to clear on one word when you use the word harvest on the assets. I want to be clear; we have been investing in the fleet throughout the downturn. We've invested -- we start to look at that CapEx. We're able to go in and upgrade existing systems throughout their life. And that's what we've been doing. So it's not like the ROV that came out in 2018 is a 2018 ROV, it has technology today. So we're -- that's one of the benefits of maintaining a standardized fleet is we're always upgrading them to the current technology.

[Rod Larson:]

We did a full refurbishment of 91 of the major ROV assets last year, 18 of those were the fish. So when you think about a body of restoration that brings it up to the -- just like a brand new ROV. Two good things about that is our cost of capital to basically create a new ROV out of an old one is much lower than somebody buying a new asset. And at the same time, it's a great ESG story because there's a lot of recycled and reasonable parts there that we're able to use to put a new asset in the field.

[Eddie Kim:]

Got it. Got it. That all makes sense. And I appreciate all the color there. So very constructive commentary on offshore spending this year. Most are also expecting offshore FIDs this year to mark a 10-year high. which I would think would disproportionately benefit your umbilicals business. I don't think I heard a book-to-bill guide for this year, and I'm sorry if I missed it, but -- could we see book-to-bill exceed the 1.4 times given last year?

[Alan Curtis:]

I think it's certainly north of 1. I don't have the number in front of me, Eddie, there are several, I'll say, larger scale projects that we are anticipating that if they come through in the year, I think it is attainable at the similar level. I don't know if those orders will hit Q4, Q1 of next year, but it's our expectation that we could certainly get to that level if those projects materialize in the time frame we expect.

[Eddie Kim:]

Got it. And could you just remind us kind of the typical timing between project FID and when you would typically book the order for the umbilical awards you win. And what's the typical timing on revenue conversion on those works as well?

[Alan Curtis:]

Yes. Typically, what you're going to see is once FID is achieved, first thing they're probably going to orders trees, then we're going to be shortly thereafter. So if you're looking at FID middle of the year, I would think by Q4, you're going to see an award maybe late Q3, later in the year, FID, it might bleed over into a Q4 or Q1 award the next year. So there's typically a three-to-four-month kind of lag in my eyes. And then once you get the award, first thing we're going to do is we've already been working with these for design elements. We'll know how many steel tubes to buy and things of that nature. We'll put long-cycle materials on order because that tends to be the pacing item today. And so it could be six to nine months on delivery for some of those materials. So the sooner they can get their FIDs achieved or some customers may want to preorder the steel tubes to shorten their cycle time, might not be a bad play for them.

[Eddie Kim:]

Got it. Got it, understood. That’s all very helpful. Thanks so much I’ll turn it back.

[Alan Curtis:]

Yes. And Eddie, that's why when our comments earlier, that's why I start seeing the pricing move now, but it's a '24,'25 margin comment earlier in the call here. Yes.

[Eddie Kim:]

Yes. Yes, that makes sense. Thank you.

[Alan Curtis:]

Thanks, Eddie.

[Eddie Kim:]

Thank you, both.

[Operator:]

Thank you. [Operator Instructions] At this time, there are no further questions. You may proceed.

[Rod Larson:]

Yes. Since there are no more questions, I'd like to wrap by thanking everybody for joining the call. This concludes our fourth quarter and full-year 2022 conference call. Have a great day.

[Operator:]

Ladies gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.