Oceaneering International, Inc. (NYSE:OII) Q3 2023 Earnings Call Transcript
Oceaneering International, Inc. (NYSE:OII) Q3 2023 Earnings Call Transcript October 26, 2023
Operator: My name is Julie, and I will be your conference operator. Welcome, everyone, to Oceaneering's Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer period after the speaker's remarks. With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations.
Mark Peterson: Thank you. Good morning and welcome to Oceaneering's third quarter 2023 results conference call. Today's call is being webcast, and a replay will be available on Oceaneering's website. Joining us on the call today are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments; and Alan Curtis, Senior Vice President and Chief Financial Officer and Hilary Frisbie who is working with me in Investor relations. Before we begin, I would just 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 third 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. As is our custom at this time of the year, we're happy to be providing you with our initial thoughts on Oceaneering's 2024 outlook. As announced yesterday, we are initiating 2024 guidance for earnings before interest, tax, depreciation and amortization or EBITDA in the range of $330 million to $380 million. At the midpoint, this would represent a 25% increase over $285 million, the midpoint of our revised adjusted EBITDA guidance for 2023. We are confident in our ability to deliver this solid improvement in 2024 based on continuing expectations of growth in our traditional offshore energy businesses driven by growing global energy needs, increasing backlog as evidenced by our third quarter order intake of almost $900 million, expectations for measurable growth in our Aerospace and Defense Technologies or ADTech segment, and anticipated improvement in our nonenergy manufactured products businesses.
These fundamentals also underpin our expectations that our 2024 free cash flow will exceed that generated in 2023. Now I'll focus my comments on our performance for the third quarter of 2023, our current market outlook, Oceaneering's consolidated and business segment outlook for the fourth quarter and full year of 2023 and our initial consolidated 2024 outlook, including the previously mentioned EBITDA guidance range and free cash flow expectations. After these comments, I'll then make some closing remarks before opening the call to your questions. Now to our third quarter summary results. Our improved third quarter results were primarily due to strong global offshore activity. We produced $53.7 million through free cash flow and $84.1 million of adjusted consolidated EBITDA, which was at the upper end of our guided range and exceeded consensus estimates for the third quarter.
Offshore activity drove quarter-over-quarter operating improvements in our Subsea Robotics or SSR and Offshore Projects Group or OPG segments. In addition and as expected, we also saw improvement in our ADTech segment. Now let's look at our business operations by segment for the third quarter of 2023. SSR revenue and operating income both increased as expected when compared to the second quarter with lower activity levels for ROV being offset by slight ROV pricing improvements and higher survey and tooling activity. SSR EBITDA margin of 31% improved over the second quarter of 2023, reflecting the benefit of new contract pricing. The SSR revenue split was 76% from our ROV business and 24% from our combined tooling and survey businesses compared to the 78% and 22% split respectively in the immediate prior quarter.
Sequential ROV days on hire were 1% lower at 15,932 days as compared to 16,032 days during the second quarter with a decrease in drill support days and a slight increase in vessel based services. Our fleet use was 61% in drill support and 39% in vessel based services, the same as in the second quarter of 2023. We maintained our fleet count at 250 ROV systems and our third quarter fleet utilization was 69%, a slight decline from the 70% achieved in the second quarter. Average ROV revenue per day on hire of $9372 was 3% higher than average ROV revenue per day on higher of $9077 achieved in the second quarter. At the end of September 2023, we had 61% drill support market share with ROV contracts on 89 of the 146 floating rigs under contract as compared to the 62% recorded for the quarter ended June 30, 2023 when we had our rig contracts on 91 of the 147 floating rigs under contract.
Turning to manufactured products, sequentially, our third quarter 2023 operating results and revenue declined. Operating income and related margin percentage of $8.2 million and 7% respectively declined from the second quarter of 2023 due primarily to changes in product mix. Order intake during this quarter was strong throughout our energy businesses with backlog increasing to $556 million on September 30, 2023 from $418 million on June 30, 2023. Our book to bill ratio was 1.25 for the nine months ended September 30, 2023 and was 1.41 for the trailing 12 months. OPG third quarter 2023 operating income increased as compared to the second quarter of 2023 on a 15% increase in revenue. Operating income margin improved 18% as compared to the 13% margin achieved in the second quarter, reflecting increased demand for vessel based services globally, changes in service mix and the successful resolution of a commercial dispute.
Integrity Management and Digital Solutions or IMDS, third quarter 2023 operating income declined slightly from the preceding quarter on a 5% increase in revenue. Operating income margin of 5% declined from the 6% recorded in the second quarter of 2023 due primarily to slight changes in geographic and service mix. ADTech third quarter 2023 operating income increased significantly from the second quarter on a 6% increase in revenue. Operating income margin of 14% improved from the second quarter of 2023 and benefited from margin recovery on prior quarter contract costs. Unallocated expenses were $42.2 million. Now I'll address our outlook for the fourth quarter of 2023. On a consolidated basis, we believe that our fourth quarter 2023 EBITDA will decline on relatively flat revenue as compared to our third quarter results.
While we anticipate a seasonal slowdown in the fourth quarter, we still expect relatively good activity in our offshore markets. Broadly for the fourth quarter of 2023 as compared to the third quarter, we expect slightly lower activity in each of our segments except for manufactured products and slightly lower unallocated expenses. For our fourth quarter 2023 operations by segment as compared to the third quarter of 2023 for SSR we are projecting slightly lower revenue and relatively flat operating profitability. ROV days on higher are forecasted to decline slightly as compared with the third quarter with slightly higher drill support days being more than offset by a seasonal decline in vessel based days. We expect good survey activity to continue during the fourth quarter.
Our forecast assumes overall ROV fleet utilization to be in the upper 60% range. SSR fourth quarter 2023 adjusted EBITDA margin is anticipated to improve over the third quarter of 2023, while remaining in the low 30% range. For manufactured products, we anticipate an increase in revenue and significantly lower operating profitability as compared to the third quarter with operating income margin in the low single digit range. Our fourth quarter forecast anticipates costs that we may incur to improve the profitability of our manufactured products portfolio. We continue to forecast a book to bill ratio of between 1.2 and 1.4 for the full year of 2023. For OPG, we expect slightly lower revenue and significantly lower operating profitability in the fourth quarter of 2023.
Although revenue is projected to remain close to that of the third quarter, we anticipate a shift in mix with lower vessel activity in West Africa. Operating income is expected to be negatively impacted by lower levels of cost absorption in the West Africa region in addition to the absence of the commercial dispute resolution which benefited the third quarter. As a result sequentially fourth quarter 2023 operating income margin is expected to be lower averaging in the low teens range. For IMBS, we expect slightly lower revenue and operating results as compared with the third quarter of 2023. For ADTech, we forecast slightly lower revenue and lower operating income as compared to the third quarter. We expect operating income margin to decline during the fourth quarter due to slight changes in project mix.
For the fourth quarter, we expect operating income margins to be in the low to mid-teens percentage range. Unallocated expenses are expected to be in the low $40 million range. For the full year of 2023, we expect to generate adjusted EBITDA within the narrowed range of $275 million to $295 million. Our guidance for organic capital expenditures is in the narrowed range of $95 million to $105 million and our guidance for cash income tax payments is in the range of $70 million to $75 million. Our free cash flow guidance is unchanged. We expect to generate positive free cash flow in the range between $90 million and $130 million for the full year of 2023. Now turning to our free cash flow and debt position. Our cash flow from operations for the third quarter of 2023 was $79.6 million and was the primary driver in the increase in our cash and cash equivalents to $556 million as of September 30, 2023.
At the end of the third quarter, our net debt position stood at $144 million. As disclosed in our recent press releases, on September 20, 2023, we initiated a series of transactions designed to address our $400 million senior notes scheduled to mature in November 2024. Once the final transaction is completed in early November 2023, we will have significantly extended our debt maturity to February 2028 while maintaining substantial liquidity. Now looking forward to 2024. Overall, we see solid fundamentals supporting each of our current businesses for the medium term. Positive supply and demand dynamics and resulting commodity pricing support our expectations for a strong five-year outlook in our offshore energy businesses and national security priorities continue to support our expectation for growth in our government focused businesses.
In addition, with increasing demand for robotic solutions, we see expanding opportunities to leverage and grow our remote and automated robotics capabilities across our energy and nonenergy businesses. Accordingly, looking into 2024 year-over-year, we are anticipating increased activity and improved operating performance across all of our operating segments, led by gains from SSR and OPG. At this time, we forecast EBITDA to be in the range of $330 million to $380 million in 2024, driving meaningful levels of cash flow from operations. I would like to point out here that our guidance range for 2024 anticipates a continued strong U.S. dollar, which would negatively impact U.S. dollar earnings in our international businesses, particularly in countries like Norway, the UK and Brazil.
We currently estimate the year-over-year EBITDA impact to be in the range of $5 million to $10 million. In 2024, we expect capital expenditures to be flat to modestly higher than 2023 as we focus on growth of our various robotics platforms and opportunities generating the highest returns. Capital discipline remains a priority and we expect to generate positive free cash flow in excess of that generated in 2023. We will provide more specific guidance on our expectations for 2024 during the year end reporting process. In summary, based on our year-to-date financial performance and expectations for the fourth quarter of 2023, we are narrowing our adjusted EBITDA guidance to a range of $275 million to $295 million for the full year. We continue to see growth in all our business segments in 2024 based on the increasing global demands for energy and continued focus on national security issues.
Expanding opportunities to apply our robotics expertise in new energy and nonenergy markets including for example our Freedom autonomous underwater vehicle and MaxMover autonomous counterbalance forklift provide us with further confidence in our ability to achieve these growth forecasts. Our focus continues to be on maintaining a strong safety culture and safety performance, maintaining our financial and capital discipline, generating significant positive free cash flow, growing through organic and inorganic means attracting and retaining top talent and increasing our pricing and margins to generate a fair return for our world class services and products. Optimizing each of these priorities positions us for success during the energy transition.
Our continuing commitment to maintaining substantial liquidity and a strong balance sheet and generating meaningful free cash flow supports our ability to fund future growth and shareholder return aspirations. We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you may have.
See also 25 Hottest Selling Products in USA in 2023 and 20 Most Influential Entrepreneurs Today.
To continue reading the Q&A session, please click here.
