Q3 2023 Oceaneering International Inc Earnings Call

Participants

Alan R. Curtis; Senior VP & CFO; Oceaneering International, Inc.

Mark E. Peterson; VP of Corporate Development & IR; Oceaneering International, Inc.

Roderick A. Larson; President, CEO & Director; Oceaneering International, Inc.

David Christopher Smith; Partner & Senior Oil Service Analyst; Pickering Energy Partners Insights

James Joseph Schumm; VP; TD Cowen, Research Division

Kurt Kevin Hallead; Research Analyst; The Benchmark Company, LLC, Research Division

Presentation

Operator

Welcome, everyone to the Oceaneering's Third Quarter 2023 Earnings Conference Call. (Operator Instructions) With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations.

Mark E. 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; 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 statement 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.

Roderick A. Larson

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 expectation 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 of 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 SR, 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 ROE 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%-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 the 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 $9,372 was 3% higher than average ROV revenue per day on hire of $9,077 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 ROV 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 rate was 1.25 for the 9 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 to 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 hire 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 ROE 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 in 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 IMDS, 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 2023, we expect to generate adjusted EBITDA within the narrow 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 5-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 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 U.K. 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 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 to national security issues, expanding opportunities to apply our robotics expertise in a 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 we'll now be happy to take any questions you may have.

Question and Answer Session

Operator

(Operator Instructions)Your first question comes from Kurt Hallead from Benchmark.

Kurt Kevin Hallead

Never a dull moment. So I'll start with an observation. And given your guidance levels for 2024, it looks like they're within 2% of where the Street is, I'd say, a 9% selloff is it's definitely overdone. But what do I know. So on to the question. So you kind of provided an outlook -- initial outlook on EBITDA for 2024. And you referenced the SSR and manufactured products part of the business will be the strongest driver of that. So I was wondering if you could maybe give us a little more context around, let's say, SSR and what you think in terms of utilization? And what kind of margin progression do you think you get out of that going into next year.

Roderick A. Larson

Sure. I'll hit that a little bit, Kurt. I think what we're seeing is on utilization, we're tracking kind of what we have line of sight to the rig increases mostly. I mean we think market share holds to maybe improve slightly from where we are today. So depending on how many working rig adds we have next year, we think that, that goes into the low 70s during those peak month or peak quarters. But again, it's not huge unless we see more working floater days. So that's it for utilization. But again, encouraging news. We just -- we look at what we hear in the market, but we also look at what we have hearing from the rig operators themselves telling us what the schedule will be. So that's kind of where we land on utilization.
On pricing, One of the things we'll just say is we continue to drive pricing. I think there's been a lot of optimism out there. And I think what's driving consensus is the pricing improvements probably are happening in smaller bits and chunks than maybe what was out there in the market, but it continues to be directionally correct. So we just have to see how long it takes to recognize all of those, but we definitely see continued -- and walk up in margins into next year...

Kurt Kevin Hallead

Got you. And then maybe my -- yes.

Alan R. Curtis

Yes. I think, Kurt, your other question in there was about OPG and kind of the outlook, why we have a level of confidence there. And I think we've been talking through several of the items that we have in our -- out for bid right now. We're seeing a lot of market interest in kind of some of these field support services contract, which tend to be longer duration, tends to be true to 4 years in contract length. So we're encouraged to see the market out there that is kind of returning to what we saw back in 2014 time frame where people would sign up for longer duration contracts for vessel and support services, project management and other services we can provide. So that's the other part of why we see OPG really starting to hit on more cylinders in '24.

Roderick A. Larson

And Kurt, I want to make one comment before you ask your next question. I mean you said it kind of when you opened up that we're not that far off a consensus. And that's why we did want to point out the FX effect. And really, when we think about -- I think our numbers are the same. I think the consensus was pretty much right without maybe us having the full shared benefit of what the FX effect. A lot of our growth next year is coming from international markets and that kind of -- with the strong dollar, we think that there's going to be some pressure on currency in Norway, currency in the U.K. and Brazil. So if you true that up, I bet we're darn close to the same number.

Kurt Kevin Hallead

Okay. Great. Appreciate that color. Second question then is on -- I believe your industrial robotics business is embedded in manufactured products, right? So I just wonder if you could give us an update on the market penetration you have, whether that's on the autonomous forklifts or on your autonomous people movers, just how you see that business evolving and what kind of market penetration you've been able to get?

Roderick A. Larson

Market penetration is going up. We're getting new customers. So we've added a couple of customers with some pretty strong interest. I think everything just short of the PO, but that could change today. So that -- the number of customers is improving, but also the order from our one biggest customer. We got 4 more orders that are significant. So that looks really good and really strong. And again, we're getting a lot of recognition for that.
The other thing I would just call out in manufactured products is we had our annual planning meeting last week, and we pushed really hard on margins in manufactured products. So we've built in some cost for -- we don't know what those changes will be, but we built in some costs. We're taking some action that we think will drive margin improvement in the manufactured products business.

Alan R. Curtis

Yes. and I think on mobile robotics, I mean, you may have seen or not seen the recent announcement that came from ZF as well about solidifying our arrangement on the people movers we've been describing to the market. So I think that's something that doesn't really impact '24 as much. But longer term, we're encouraged with what we continue to build out in mobile robotics. .

Operator

(Operator Instructions) And your next question comes from James Schumm from TD Cowen.

James Joseph Schumm

Just snuck in there. .

Roderick A. Larson

Glad you dodged, man.

James Joseph Schumm

Just maybe update on the SSR or the ROV, day rate outlook. I mean in the past, we've talked about exiting this year at $10,000. And then I think in '24, the exit rate of $11,000. Is that still in play? Is that?

Roderick A. Larson

I think it's challenged. I don't know that the numbers have gone away, but I think it's just taking longer to build. So whether that takes another quarter or 2 to get to those numbers, I think we're still pushing hard. And some of it depends on how some of the other markets develop. We've got the strong markets, and I'll just say the strong markets like West Africa and GOM, we're on track. I think where it's harder is some of the -- and Norway is a fairly stable market, but those are lower ROV rates. So they're on the underside of the average in Brazil, which is growing is probably one of our opportunities, especially with non-Petrobras customers to try to get to something that looks more like the global average.

James Joseph Schumm

Okay. Great. And then in the past, you guys have had an issue in ADTech with government funding shifting around when we have these dislocations with government spending and now we're talking about is there going to be a continuing resolution or -- so I just wanted to see if you're having any issues currently and if you expect any negative impact to ADTech as we go forward in the next few months and quarters?

Roderick A. Larson

We've scrubbed that pretty well, James. And what I would say is it's not like we had in the past where -- I mean one of the biggest problems is continuing resolution need means that new projects aren't being accepted. Most of what we're working on right now is existing products. So that bodes pretty well. There are a couple of things that we think maybe would be sensitive to delay, but they're smaller projects. So it's -- we've got most of that built in the mix.

Operator

Your next question comes from David Smith from Pickering Energy Partners.

David Christopher Smith

Very impressive order intake for manufactured products. I was wondering if you could give any color there, if there were some big, lumpy orders. And maybe just if you had a quick update on what percentage of the backlog for the that segment is nonenergy.

Alan R. Curtis

Yes. I think part of the order intake, it's certainly been widespread. There is not really a single order, which we've alluded to in the past, some of the lumpiness that can come in. These have been a pretty good fluent stream of midsized orders, I would say, across various plant sites. And while we haven't disclosed the orders in the nonenergy side, David, I mean, Rod just kind of alluded to, we did see some nice orders in the third quarter to add to the backlog in the mobile robotics platform. So we've more than doubled the base order at this point in time that will certainly build a nice platform for manufacturing next year on these autonomous mobile forklifts. So our order adoption is certainly picking up across the board within that business unit.

David Christopher Smith

That's good color and appreciated. I guess kind of related...

Alan R. Curtis

David, one of the things I'd like to just add is as I look at that backlog, and what's important to me is we do still anticipate some additional awards in the manufactured products. But when you get it across all the plant sites, and I've lived in this business, it's more meaningful than just getting one big award because we talk about absorption all the time at these plants. And by being able to feed every plant that work, it is something that we're always looking at. So it's well spread through the organization.

David Christopher Smith

I appreciate that color. I did want to make sure just to refresh my memory, the DPR system or syntax wise, that would be coming through OPG, correct?

Alan R. Curtis

Correct.

David Christopher Smith

Perfect. And...

Alan R. Curtis

It's kind of the extension to the existing contract with an option for Petrobras to add an additional system, which, at this point, we don't believe they're going to take, but it's an option they do hold through December of this year. But it's been good work for us. In fact, Brazil has been a strong growth area for us throughout many of our businesses this year.

David Christopher Smith

Yes, absolutely. And last one, if I may. Just for calibration, could you please elaborate on the impact that the commercial dispute resolution had for the OPG margins in the third quarter?

Alan R. Curtis

I don't think we've put a number out there on that, but it's really an element of what we had in Q1, Q2, where we've taken some level of reserves and we're able to successfully negotiate it with the customer in the third quarter.
So within the year, the pot is right. So the margins for the year, what I would say, reflective of our true operations. We just had a little bit of that, I'll say, lumpiness of working through this with the customer within the quarter.

Operator

And there are no further questions at this time. I will turn the call back over to Rod Larson for final comments.

Roderick A. Larson

All right. Well, since there are no more questions, I'll just wrap up by thanking everybody for joining the call, and this concludes our third quarter 2023 conference call. Thank you.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.