Good morning. My name is Denise, and I will be your conference operator. At this time, I’d like to welcome everyone to Oceaneering’s Second Quarter 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. With that, I will now turn the call over to Mark Peterson, Oceaneering’s Vice President of Corporate Development and Investor Relations. Please begin.

Thank you, Denise. Good morning, and welcome to Oceaneering’s second quarter 2019 results conference call. Today’s call will be webcast and a replay will be available on Oceaneering’s website. Joining us today on the call are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments; Alan Curtis, Chief Financial Officer; and Marvin Migura, our Senior Vice President. 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 second quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Good morning, and thanks for joining the call today. Today, I’ll review details of our second quarter 2019 results and provide guidance commentary for the third quarter and the second half of the year. I’ll then make some closing remarks before opening the call to your questions. Our second quarter can be summarized in the following five points; ROV utilization improved to 62%; Subsea Products backlog grew by $132 million; Subsea Projects results were marred by operational issues and the lack of a robust call-out market; Advanced Technologies did not win a significant U.S. Navy project as forecasted and production timing associated with certain theme park projects was delayed; and certain unallocated expenses were deferred into the second half of the year. Overall, our quarterly operating results improved by $12.1 million. Earnings before interest, taxes, depreciation and amortization, or EBITDA, of $40.3 million met our expectations and was in line with consensus estimates. During the quarter, we generated $12.7 million of free cash flow. For the second quarter, we reported a net loss of $35.2 million or $0.36 per share on a revenue of $496 million, and we had $356 million of cash and cash equivalents at quarter end. Now let’s look at our business operations by segment for the second quarter compared to the first quarter and our prior guidance. ROV operating income improved as expected, increasing by $7.3 million. This improvement resulted from higher seasonal activity for vessel-based services and an increase in the number of working floating rigs for which we provide drill support services. Sequentially, revenue grew 20%, principally on a 19% increase in ROV days on hire. Fleet utilization improved to 62% from 53%, mostly attributable to increased international activity. Our fleet use during the quarter was 63% in drill support and 37% for vessel-based…

[Operator Instructions] Your first question comes from Sean Meakim with JPMorgan. Your line is open.

Good morning, Sean.

Thank you. Hey, good morning. So I appreciate all the detail around the quarter and the forward guidance. I was hoping maybe just to kind of restate or kind of – to put all the pieces together. So to get to that – the implied guidance, you’ve given some of the unallocated expenses there moving towards the back half of the year. We’re looking at an implied segment level run rate of something like $50 million a quarter in the back half. How do we marry that with the sooner than expected flat to down performance for the energy segments in the third quarter and then some of the seasonality parts we see in the fourth quarter? It sounds like from what you said, the weighting is pretty heavy on the fourth quarter to get to that guide with really – relying on products revenue ramp, some incremental drill support activity in ROVs and then significantly better results in AdTech. Would you mind kind of help me see how those moving parts all fit together to get to that guide in the back half?

Sure, Sean. I think you’ve got – you pretty much kind of decoded that is that third quarter is mostly AdTech. It’s the AdTech improvement. And then in the fourth quarter, we do see the product side kicking in with the others being sort of flat to down. So it really is all about the AdTech and the products piece, which – and it’s part – that’s part of why we have the confidence we do is that those are largely based on manufacturing backlog.

And so I guess, what would be your confidence level, given there – for the annual year, so much with being weighted on the fourth quarter it seems?

I still feel good about it because like I said, it’s in backlog. I mean, there’s – a lot of that’s already there. We’ve got what we see for the ROVs, for example, when we – you think about what’s going on in ROVs, particularly for the fourth quarter, fourth quarter up. I think that’s largely within our line of sight. So it does feel good.

Okay. Thank you for that. I appreciate it. And then can you just talk about some of downside surprises in the quarter. It seems like projects, think of it more challenged and perhaps a bit more competition in the market than maybe what you had thought there. Can you talk about just some of the pieces there relative to what you would’ve thought not too long ago? And then similarly, in AdTech, just think about the Navy contract, can we get more clarity on what happened there?

Absolutely. Well, let me start with projects. One thing I want to clarify is because we get a little – sometimes we get a little – we mix together vessel-based activity largely with what we do in projects in the Gulf of Mexico. If you look at – for example, we’re talking about a pretty decent vessel-based market on our ROV side, a lot of that is based on the international work that is more construction and large vessel. When we talk about our IMR work in the Gulf of Mexico, that’s more call-out work for inspection, maintenance and repair, smaller vessels, different type of work, call-out work, shorter term, harder to see the contracts. And so while so many other indicators are really good for overall activity in offshore that have improved, we would have expected that base – with that base of sort of the visible work, that call-out work should have risen kind of with the same tide. We didn’t see the same. So it’s not so much competition, it’s just in the IMR space, less of that work got done in the summer than we would have expected given the activity everywhere else. So that’s really what happened to us on the project side. On the Navy side, if I could qualify that, a lot of our government work in AdTech is based on ongoing contracts, whether it’s repair on Navy vessels or what – or some of the other R&D work we do, that work is pretty steady state. We see ups and downs as activity within the ongoing contracts go up or down. And that’s why that part has been pretty stable. We stepped out a little bit. There was a very unique project that we and several others bid on. It’s not sort of the normal range of work, but it was a significant sized project. And the best I can tell you is because it’s unique and because it had its own set of challenges, I think we saw that project a little differently than the ones who won it. So I would just have to say that while it was something that we would’ve hoped to win, it was something that wasn’t sort of normal course of business, so it was a little challenging.

Fair enough. I appreciate it.

And we had expected to win it.

Yes.

And I think we lost on price.

Yes.

Right. Right. Fair enough. One last one, if I could. Just with the Mozambique contract you announced not too long ago, obviously, it was a really nice win. Just – can you give us a sense of what the world looks like in terms of big projects that are on your radar, kind of visibility and kind of where they are in the baking process?

Sure. So before we could announce Mozambique, we did talk a little bit about a couple of LOIs we had. And so while the Mozambique – we know what that LOI was, we still got the other outstanding LOI that we were working against and we announced some of the win there. We still expect an announcement there. That’s one of these large, large projects. Beyond that, I mean, there are few out there. There are few bigger projects, but I don’t think that they’re that big. I like the FIDs. I think there’s lots of activity in the FID space where we see – we have visibility to more projects coming, but I don’t know that I’d go as far as to say there’s a lot more of the size of these two that we’ve been talking about.

Very helpful. Thank you for the feedback.

Your next question comes from George O’Leary with Tudor, Pickering, Holt. Your line is open. George O’Leary: Good morning, guys.

Good morning, George. George O’Leary: As you look across just the broad base of businesses, in areas like Asset Integrity and Subsea Projects, are there any incremental opportunities to take costs out of the system? And if so – I’m just thinking about a business, in particular, like Asset Integrity, where you noted that competitive pressures are still there. If so, kind of what steps can you guys take to reduce cost in that business in particular and anywhere else that I might not be thinking about?

I think based on where the work comes up, George, I mean, we always look at rightsizing where we’re at and broadly. So you got to say, if you’re spread too thin, if you see one particular area becoming a part where you can cut your cost without diminishing your capacity, I think that’s what we’re constantly looking at. And that business is – I mean, you called it out. I think Asset Integrity is the one that we have to be careful with. And projects is one that we always monitor how we can mitigate our cost, whether it’s through how we utilize vessels, how we utilize spot charters and things like that to be able to be there. But I will say, in particular, and I want to be clear about this because we’re talking a lot about projects, in particular, it’s tough when these call-out jobs don’t materialize. But historically, they have also been one of our greatest opportunities to make good returns when the activity comes to be. And so that’s – historically, it is always a challenge to decide how much of that cost can you take out without diminishing the capacity to be opportunistic when those things appear. George O’Leary: Okay. That’s very helpful. And then on the ROV side, utilization jump quarter-on-quarter was impressive. We expected it to be up, but the magnitude was impressive. And I think you said you even expected Q4 utilization to be more resilient than it typically is seasonally. I’m curious what – correct me if I’m wrong, but also just curious what geographies are generally driving the uptick in utilization? And what geographies you expect drive the majority or polarity of that utilization in the back half of the year?

So I guess when you look at Q4, and this is kind of utilization across the year, Q2 and Q3 were strongly driven by, like I said, sort of that international vessel-based activity, especially on the construction side. Q4 is based on our – this walk that we’ve shown or we’ve talked about of increase in working contracted floaters. So that’s driving some of that – some – or the majority of that fourth quarter resiliency, as you will. And it’s not – I mean, I would say that it’s not unusual. We saw similar activity profile last year. The good part is we’re building on a bigger base. So while the profile of how the activity is going, it’s similar. We are seeing just overall an increase in baseload activity. George O’Leary: That’s helpful. And then just to make sure I don’t leave it out. From a geographic standpoint, any regions that standout that are adding to that baseload in a more pronounced fashion than others?

I would say Norway certainly an area that’s been holding strong for us. And with the uptick in rig count here in the Gulf of Mexico has been good. Even in West Africa, we’re seeing an increase. So it’s not any one single geographic region that’s really outperforming the others. I think we’re starting to see an incremental increase throughout most of the global regions. George O’Leary: All right, great. I will it back over. Thanks for the color.

Thanks, George.

Your next question comes from Ian MacPherson with Simmons. Your line is open.

Hi, good morning.

Good morning, Ian.

Rod, you mentioned – I’m sorry that I missed a key detail here in the earlier question-and-answer about a key contract that did not go your way that you missed on price. Was that – which segment did that occur in?

That was AdTech in our government business. We had...

That was the Navy contract. That’s what I was curious about.

You got it.

So – right. So as we look towards the improvement in AdTech in the second half and hopefully, sustain momentum beyond that, I wanted to just make sure that the loss of that contract was not significantly diminishing to your backlog, such that it doesn’t cramp your ability to grow at a continuing level beyond the next quarter or two. And it sounds like that contract was described as not a normal course of business and that your normal course of contracting with the Navy is intact. Is that correct?

Yes. And Ian, let me make sure I hit both parts of AdTech here because I think it’s important when we talk about second half. So first of all, on the government side, a lot of this is based on our manpower and our capability to do work on vessels. And so when we didn’t get this one large contract, it also allows us to push harder on our existing load of work and redeploy that manpower and execute more against the other backlog. So I think that does actually – some of that shifts over to the other contract. And then the other side, the other big part of our AdTech push in the second half is the delivery of projects in our entertainment business. So – and that’s – from a size standpoint, that’s more meaningful than the shift in the government work.

Yes. And just for clarity, that one project was never in our backlog. It was – we had the expectation we would win it, and we were unsuccessful.

Understood. Thanks. A follow-up for me. I know that – you mentioned that products should enjoy continuing upward momentum in the umbilicals manufacturing sequentially throughout the year. How do you shape-up the outlook for your service and rental business in the fourth quarter? I know that you had excellent results in Q2. The mix is bringing your products guidance a little bit lower sequentially, but that’s more mix related. But how do you think the – structurally the business for your higher margin rentals and services is developing beyond just the recent quarter?

Yes. If I can give you some color, I think this will help qualify it. So service and rentals, yes, we had – and part of that is, I think we talked a lot about light well intervention. In the first half of the year, we had a significant light well intervention job that did complete. And as it finished, delivered as we used extraordinary results. Right now, we don’t have a large light well intervention type job in the mix. So that’s not in the fourth quarter results. What is there is the normal baseline work we have of service and rental tooling. And I think we’ve been – and I think we’ve got a pretty reasonable approach to that because we don’t have any of these big singular events. So I think that – the load that we have put in is in the mix in both the margin and the revenue side is attainable.

Got it. Thanks, Rod.

Your next question comes from Vaibhav Vaishnav with Scotia Howard Weil. Your line is open.

Hey, good morning, guys and thank you for taking my question. I guess just on Subsea Products, the [indiscernible] last year, I think, in 2018, were up 20% year-over-year. We have some time lag for the manufacturing process. Is it fair to think, given the time lag, that proper revenues could be up 20% in 2019?

Vebs, you always give us good math questions. We got Alan, he’s giving you the numbers. But you are absolutely correct on the activity level, and it looks like that 20% is pretty close.

Got it. That’s helpful. Given where are now today, just assuming offshore activity very modest improving, any segments that risk of being year-over-year in 2020?

We’re not – we haven’t given any...

Just conceptually...

Let me – I would just say, Vebs, I mean, if you look at what’s going on in the market from where we sit today, we don’t think there’s anything extraordinary going on into the back half of this year that you would worry about being a random event. I’ll just say that, I think.

Yes. We’ll give you more color on 2020 on our Q3 call.

Okay. That’s all from me. Thank you.

Thank you.

[Operator Instructions] Your next question comes from Cole Sullivan with Wells Fargo. Your line is open.

Hi, good morning guys. Several of mine have been touched on already, but – and the conversion rate of the kind of heavy first half orders, how do we think about that? Is it kind of more relates to 2020 with the umbilical awards? Is it – how do we think about the contribution in 2020 at this point as those start ramping up pretty heavily?

Yes. I think it certainly benefits our large factories for the umbilical manufacturing. I think when you look at the Anadarko, Mozambique award, I think we noted that those deliveries extend out into middle of 2021. So it gives us some nice line of sight to kind of a steady manufacturing plan through the factory as we hopefully announce another conversion of an LOI to an award at some point, that would give us a similar kind of line of sight to another factory. So that certainly bodes well for, obviously, the product side of the business as we look at our backlog. I think what we’ve got to look at then is as Rod was talking earlier about, all the other additional FIDs. We don’t see as many epic awards like those today in the pipeline, but you do see a healthy cadence of FIDs that are looking to come forward.

Okay. And then over to the second half of the year, we have a nice ramp there and revenues and products. And you guys have kind of guided to low single-digit margins there. How do we think about the mix kind of changing there with manufacturing ramping up as well as the Riser Award in Brazil kind of coming onstream in 4Q from what I recall?

That’s built into our mid-single-digit guidance.

Okay. As far as pacing goes, should we expect any kind of change quarter-over-quarter? Is it fairly level?

I would say it’s going to be more in Q4.

In the umbilical. And then that speaks, Cole, with the guidance. So when we were in the know, we talked a little bit about being that flat to down in Q3, but then finished in the second half in products stronger than first half.

All right. And then one last quick one. Did you guys give the mix of service and rentals in manufacturing in the second quarter?

We did not.

Okay.

We will on the Q. We will on the Q.

All right. I appreciate it. Thanks.

Your next question comes from Eduardo Royes with Jefferies. Your line is open.

Hey, guys. Good morning.

Good morning.

Question on the CapEx. It looks like you guys took that up by, if I heard correctly, towards the higher end of the range. Just wondering if there’s any more sort of discrete spend in there? Or if you had to have some catch-up maintenance spend? Just curious for that and any way you can help us start thinking about kind of the nonrepeatable items, obviously, as we start thinking about 2020?

Great question. Yes. We took it up to the higher end at 125 for the year. And you’ll notice we also took up the maintenance from that $40 million to $50 million to $50 million. Most of it is with the increased activity in the ROV segment. We are seeing some increased cost to serve that market. So when you – that was the main reason for taking up the guidance there to the high end of the range. We will say it as the good cholesterol. So when I start looking at what’s the nonrepeatable going into next year, we’ve talked a lot about, we have the drill pipe riser contract that we’re building the assets this year as well as we had the final payments in cost associated with the Ocean Evolution coming out this year. So those are two pretty significant items that impacted our CapEx spend in 2019 that are probably not recurring in 2020.

I guess along those lines, is all the Ocean Evolution payments – is all of that behind us now? Was that in the second quarter? Or do you still have some payments on the Evolution coming?

That was behind us now. We completed it in Q2 and put it into service.

Okay. And then my follow-up as it relates to projects. Just a question, obviously, the call-out market ended up being weaker than I think you guys thought even three months ago, but you also cited, I think, some cost overruns or some issues there. And I guess I’m just wondering, it doesn’t sound like the cost overruns or whatever the execution issues were particularly big because you guys haven’t – it doesn’t look like there’s much of an obvious uplift, I guess, in the margins in the third quarter. And I guess, I would’ve thought maybe that would get a little bit better if nothing else from not having those issues? So just help me think about that, please.

I think the way you can say that is that there were – we had other things going on in the quarter that would’ve stood out as being more exceptional had we not had the extraordinary operational issues. So that’s – those canceled each other out, which was kind of the disappointing Q2 not being able to deliver on those. But then again, we still see this on – less of the call-out market than we would have liked to see in Q3 as well. So – and like I said, I’ll reiterate that is that with so many of the indicators with ROVs and FID in the product space, it’s just – hopefully, we can see this start to impact the IMR market as well going forward.

I think it’s pretty safe to assume, right, that you guys aren’t baking in much of any improvement in the IMR side in the Gulf of Mexico at this point in time. I guess not to try to get excited about the bottom line. Is it remains very tough to see, right? So there is – the expectations are pretty low right now, I guess, is the point. There could be some upside.

Exactly. Like we said, that is a big part, the biggest part of our takedown of the guidance range. So at this point, we call – we think it’s going to be. So I don’t think we’re hanging on to anything that would produce any future risk in the guidance.

Okay. Thanks. I will turn it over.

There are no further questions queued up at this time. I’ll turn the call back over to Rod Larson for closing remarks.

All right. Well, since there are no more questions, I’d just like to wrap-up by thanking everybody for joining the call. And this concludes our second quarter 2019 conference call. Have a great day.

This concludes today’s conference call. You may now disconnect.