Good morning. My name is Lorrie [ph] and I will be your conference operator. At this time, I would like to welcome everyone to the Oceaneering’s Third 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 our host, Mark Peterson, Oceaneering’s Vice President of Corporate Development and Investor Relations.

Thank you. Good morning, and welcome to Oceaneering’s third quarter 2019 results 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, 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 third quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Good morning and Happy Halloween, and thanks for joining the call today. Today, I’ll review details of our third quarter results and provide outlook commentary and guidance for the fourth quarter of 2019 and for 2020. After my closing remarks, we’ll open the call for questions. So looking at our third quarter 2019 financial results, our third quarter 2019 operating results met our expectations and our adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, of $45.4 million exceeded published consensus. Overall, we were encouraged by the better than expected contribution from our energy segments. Excluding the impact of $7 million of certain tax adjustments and after-tax effects of $3.5 million for foreign currency exchange losses, our adjusted net loss per share was $0.30. Compared to our adjusted second quarter results, operating results for the third quarter improved by $4.4 million, mainly due to favorable operating contributions from Subsea products and ROV and lower unallocated expenses, which was partially offset by a lower operating result in our advanced technology segment. Now let's look at our business operations by segment for the third quarter. ROV operating income improved by $1.5 million in the third quarter, as these results included a $2.8 million dollar gain associated with the sale of ROV accessory equipment that was integrated into a customer's rigs. This improved performance compares favorably against the slight decline in operating contribution expected. However, when excluding the impact of this gain, EBITDA margin was consistent with that of the second quarter. Operationally for the third quarter of 2019 as anticipated, average ROV revenue per day on hire was lower, declining 4% sequentially as a result of changes in geographic mix. ROV days on higher decreased by 2% to 15,146 days with slightly lower days on hire in both drill support and…

So we'd like at this point to open the line for questions.

[Operator Instructions] Our first question comes from the line of Kurt Hallead with RBC.

Good morning, Kurt.

I have to admit that there is a prior call that had been running late, so I did miss vast majority of your prepared commentary but I obviously do see what you guys put out last night. So I will apologize for others on the call who have been on the entire dynamics. I guess my dynamic here gentlemen is, when you look out into next year, right, we're continuing to get some encouraging commentary from the offshore drillers about increased activity though there is still an element of kind of short duration dynamics it looks like on the first half of next year. Now you guys obviously provided some guidance on EBITDA for 2020, and in that context, just want to get general sense from you and how you see the ROV dynamics and how you see ROV utilization kind of playing out, you know it was some of the commentary we've been hearing kind of help us connect the dots on that would be great.

I think you've got the -- you've nailed the dynamic, Kurt. I mean, we see this kind of building off of this highest level of drill support days that we've had all year being in the fourth quarter. We think that that gradual walk up continues, that's a slope we're on for 2020 so that correlates well with what we hear from the offshore drillers and we just -- we do expect better utilization and better activity, higher number of drill support days for next year, which is a significant part of what drives us up into that $180 million to $220 million range.

All right. So if you're looking at, well, low 60% utilization on ROVs going into fourth quarter here, is that -- is that a dynamic where that utilization could push back into the high-60s or can you give us some general framework on how we could think about it?

I think you're talking about walking into the 60s. I don't think we can call it quite right or quite accurately yet. We're still building the definitive operating plan for next year, but it's got to be there to hit the numbers we…

And Kurt, I think you hit the nail on the head of our drill support, where most of the contracts that are being talked about are short duration. We're still going to have the churn. So it depends upon, you know we need longer-term visibility on rig contracts, and not just rig contracts but rigs working. There may be contracted but they are vital periods between wells and that kind of -- so that's what keeps us from declaring where -- and vessel utilization is always expecting it. So it's really hard for us to be able to say, well, we think will be in the low-60s, mid-60s, high-60s, you know we don't know it. It's going to be hard to figure that out.

That's fair enough. Now on the Subsea Products side, right there have been indications of continued FIDs for projects and estimates out there ready for subsea tree awards and so on. Can you give us some general sense as to how you might see that playing out in the context of your Subsea Products business and whether or not you think that could -- your baseline dynamic where you think you get a book-to-bill maybe above 1 again in 2020?

I don't think we're prepared to give any kind of level of guidance on book-to-bill for 2020 at this point, Kurt. I think what we're encouraged by is the backlog we're entering into 2020 whip gives us the visibility and the confidence to give the guidance range that we did. Maybe at the end of the year we update our guidance, we would -- maybe we can shed some light on that.

Okay. Fair enough. I'll keep it there and see if anybody else has more questions for you.

Thanks, Kurt.

Your next question comes from the line of George O'Leary with Tudor Pickering.

Close enough.

Good morning.

Good morning. The decision to spend incremental CapEx this year, I think, that is positive especially given your commentary that some of that is just around the ROV business. I wonder if you can peel back the onion there a little bit and why don't you talk about maybe geographically where you guys are seeing the most green shoots there. And then two, a little bit more on the ROV side. What portion of that incremental CapEx -- what's that going to, is that more tooling, ROVs adding capabilities or just bringing stuff back off the shelf? Just curious for a little more color there.

It's really a mixed bag. I don't know if I could give you anything that would add color to exactly where it's happening. We see uptick all around -- all around the world. I would say that the mixture of -- for ROVs, the spend generally in ROV is going to be around some enhanced capability on the ROVs as we put them out, because the requirements for each customer are slightly different. So we do have to add capability in the ROVs and generally that only goes up these days. So that's part of it. And then the other part is just the deployment, you know how we're deploying them on the rigs -- the rigs we're going to. So there is some of that just that installation cost of the over boarding type equipment that we sent out with the ROVs. So that's kind of where the spend is. I think that's the good thing is why we say some of that happens this year, next year we hope tapers off or we expect to taper off that's given our OpEx or CapEx guidance for next year, and that's really what's going on there as far as where it's at. Something that I think it's important to understand is where, we throughout those numbers a couple of times last year over this past year I think about, how -- even though our utilization has been in that 50% to 60% range, 85% of our vehicles worked in the past year. This year we're actually bumping up toward 90% of our vehicles actually working in the course of the year. And so, when you think about just that 5% shift, it means that we've had to make an investment in a couple of dozen vehicles to get those extra days. And if you spread the extra days that we've had over those vehicles, it actually works out to be about a 60% -- upper 60% utilization on 2,000 more vehicles. So there is a reasonable amount of equipment going back to work that we've had to invest in.

Great. That's very helpful color. I appreciate it. And then second with CapEx, as you look at 2020 in the budget you guys outlined. I wondered if you could talk about kind of the -- what drives that gap that $70 million to $100 million. What gets you to the low end? What gets you to the high end? Some color there would be great.

I don't think we're ready to give too much color on that yet. I think, I would just tell you that one of the biggest difference between high and low-end is just discipline. We are going to be very hardcore about only putting out stuff that we think is smart to put on the market, not just adding more of the same into an oversupplied market. So we're going to be careful and we're going to make sure we only do things to deliver the right kind of returns.

All right. That's good to hear. I'll turn it back over. Thank you.

Our next comment comes from the line of Ian Macpherson with Simmons.

Hey, thanks. Good morning everyone.

Good morning, Ian.

Good morning.

As a humble modular of your business, two of the trickier parts to predict accurately have been where your margins go and products, and then also just AdTech overall. And I wanted to delve into the 2020 EBITDA guidance. You really called out products in ROVs as your leaders of growth next year. I wanted to see if you could share sort of what your assumptions are for the margin trajectory at your midpoint for products even if you could bracket it? And then, for AdTech, notwithstanding the hiccup in Q3, it's been your fastest grower for the past few years. And I wonder if -- if you are not promoting that as a key growth cog for next year. Why that is -- if it's a reflection that you think it's going to be flatter or that you're just not willing to commit to a growth forecast yet because of visibility, A or B there? Thanks.

Let me start with the AdTech piece, and I'll let Alan weigh in on the others which may be limited comments. But AdTech, I do think it's still -- we still feel good about AdTech, we feel good about the growth in the commercial side. The government side has been growing. And I think everybody needs to remember, the government is still the biggest part of AdTech. So and it's a steady -- it's been a steady business, it's been growing at a nice rate although not a -- what we -- kind of a tech company kind of rate, but it has been strong for us. So if I think about the commercial side, that's the entertainment, the AGV business, they are good -- there have been good growth opportunities especially on the entertainment side. We've captured new customers and that's part of, you know when I think about what's going on in those businesses, some of those new customers. The third quarter hiccup was just trying to get some deliveries out of the door, finishing up projects that ran a little long. Getting acceptance from new customers sometimes is harder than the ones you know better. So we're doing that. And then there were some subsequent orders from at least one of those customers that was kind of hanging in the balance that pushes out as we're delivering the other ones. So I would call those kind of in-period type issues that we don't expect to be something that continues or affects us negatively in 2020. So I'm still very bullish on AdTech. I think that is out there, but it's just trying to keep it in the context of the size of that commercial business relative to AdTech and relative to Oceaneering. Alan -- I will see how much Alan wants to prognosticate on 2020.

Probably very little here, right. When I look at, not really going into segment level detail on our guidance for 2020 at this point in time, I do think it's pretty clear that most of the revenue increase within products is going to be led by the lower margin manufactured product. So I would say that, this year, we're in the mid-single digit range, somewhere there shortly above that maybe for 2020 is kind of my gut belief, we haven't done a full roll up at this point in time.

I think one of the things you've got to keep an eye Ian is, when you saw that margin improvement in Q3, that was our service and rental business. And inside of service and rentals is a reminder is the light well intervention piece and that kind of work. So that tooling, light well intervention, big work packages in ROE support, those kinds of things obviously have higher margins and they drive margin when those businesses are healthy. I will just say that we do look forward to more of that light well intervention work. We think the market looks good for 2020. So that would provide upside in margins, but it's on a bigger base like Alan said with little more manufacturing throughput. So while we can't nail down the numbers, we can -- kind of give you that kind of color about what we see coming down.

Yes, that's really helpful. That's perfect. Thanks. And then -- so, if you hit your numbers, there will be a significant free cash flow improvement next year maybe upwards toward the $100 million year-on-year improvement. Where does that cash go? Do you park it the balance sheet until the crosswinds clear up a little bit or do you have a purpose for the cash next year?

No, I'd say we park it on the balance sheet for the time being.

Got it. Thanks guys.

Thanks.

Your next comment comes from the line of Cole Sullivan.

Hi, good morning guys. In the 2020 guidance range, we've talked about a few of the bits and pieces that would go into the low, mid, and high end of that range. Can you talk a little bit about the call-out work that didn't really materialize this year and how you kind of think about that within the guidance brackets for next year?

It's, I would say, I don't want to be overly optimistic about how we paint that picture. I think just like this year, we expect that there to be more of that call out work. I think some of that can be -- you can get a bar wave of that where some things that can be put off -- that have been put off can only be done for so long. So it's hard to know when something is going to break or a choke change-out is going to need to be done or a Subsea Control module. So the IMR part, it's -- there's just not a lot of grade -- really signals on that. I think we find it in some ways best correlated to the price of oil and budgets. Though our budgets are set if that work gets done but -- you know we aren't expecting that -- we don't see a lot of indicators that would drive that and I think that's evidently higher.

So I think it's going to be led by ROV and products.

So I would think that suggested projects is not going to be the leader?

No.

Okay. Thanks for that. And then, I believe I was taking notes pretty -- pretty quickly there, but on Asset Integrity, I believe you said operating income would be positive in relation to all the energy segments which would include Asset Integrity which has been a laggard this year. What do you see kind of affecting that next year that would drive some improvement there or did I miss here?

I think it's a combination of cost reductions that we're implementing as well as some specific contracts that we've targeted throughout the year. So I think cost-outs, it's going to be a leading element of why we see profitability in that group next year and our success on a few contracts will help bolster it as well.

All right. Thank you.

Your next question comes from the line of Sean Meakim with JPMorgan.

Good morning, Sean.

Good morning. So maybe to start off, I was -- I was hoping to follow-up on the AdTech commentary. So with the challenges in the third quarter, would you say that profitability just shifted quarters or can you maybe help quantify how much net has been lost on those project due to cost overruns in the business, the challenge you saw in the quarter?

I would say, Sean I mean, we've kind of characterize and internally it is being fairly balanced between what's pushed and what was cost overrun. So split it somewhere around there.

And so -- we've to call it low to mid-single digit margin versus the expectation was for double-digit. We could kind of may make a revenue adjustment and try to split the difference there and not be a way to quantify a bit?

I think that's a fair way.

Okay. Thank you for that. And then I'm thinking about the breakeven level for free cash flow, you guys have identified that as that you know call roughly $160 million, so $40 million a quarter of EBITDA. You cleared that bar this quarter, but of course CapEx was a bit frontloaded relative to 4Q. Do you plan to get the free cash flow positive for the year at 4Q, but working capital seasonality is driving that. Could you maybe just give us a sense of your confidence level around free cash generation at that, call it, $40 million of EBITDA on a -- on a normalized basis with working capital neutrality?

Yes. And I think it's one that what we see is the timing of inventory and receivables right now impacting a lot of that, and the payments associated with those items. So when we looked at Q3, one of the things we had was a lot of capital equipment that we were buying into the drill pipe riser contracts, some ROVs as well. So it got loaded into Q3 more so than just a spread across the four quarters. So it was a heavier in the third quarter for CapEx as well as when we made the payments associated with those. I would also look at looking into Q4, the timing of shipments of some items that we've been building for inventory we expect to be able to ship within the quarter as well as payments associated there out. So we do see that we should be able to draw from our working capital on the balance sheet during Q4. I want to make sure we get to the -- I think what was already of your question, Sean. We've had timing on CapEx. We've had timing on receivables and inventory, but also I think with our cost reductions, we expect -- we expect our confidence to generate free cash flow at that $40 million level to increase, because we continue to work on cost out simplification, all of those things. So I think it gets better over time.

Good context. I appreciate that. Thank you.

Your next question comes from the line of Marc Bianchi with Cowen.

Thank you. To follow-up on Sean's first part on the AdTech side, it's been a little bit of a disappointment here in the third quarter and you're guiding for a bounce back in fourth. What gives you confidence in that? Can we say at this point that you've kind of got the revenue in hand thus far in the fourth quarter or any other color you can provide around the confidence level there?

I think the best thing I can -- I can tell you is that, we understand what the situation is. The things that have been resolved and the things that are still being resolved in fourth quarter and that's all in the mix. That's all in the guidance. So that's kind of where our confidence comes from. We feel like we've got a pretty holistic view of what we put in the forward look.

Okay. And then maybe moving over to products. You've mentioned, I think, 1.25 to 1.4 book-to-bill for this year. And if I do some math that might imply something like a $50 million to $100 million order quarter for fourth quarter. And I appreciate you don't want to get into the orders for 2020, but if I just think about that $50 million to $100 million, and correct me if I'm wrong on that, is that maybe a good underlying order level to think about and then we can add on whatever we think of large awards you can get beyond that or maybe there is something unusual in fourth quarter and you think the level is higher or lower?

Let me -- I think there was some confusion around or I want to make sure we take an opportunity to clarify. When we looked at it, we did have the big order in Q3. But remember, some of that was covered in the LOI as well. So I don't think it was as big an elephant in the mix as some people who have made it out to be. So we had pretty good order intake aside from that big order in Q3 as well. I think -- approximately $100 million?

Yes.

So there -- when we think about that run rate, that especially with umbilicals, that intake tends to be lumpy and the timing kind of floats where it will. So we're not always perfect about when we can get those locked down, but I don't think that there is anything that we see take our positive outlook on the market about offshore energy and where it's going to go. I don't think we see any reason to say that on an average, you know you take out the noise quarter-by-quarter, that order intake looks doesn't -- certainly doesn't look worse for 2020 than it did in 2019 overall, minus like you said, minus the lumpy stuff.

Got it. Okay, great. Thanks for that Rod. I'll turn it back.

Yes.

Our next question comes from the line of Vaibhav Vaishnav with Scotia Howard Weil.

Hey, good morning.

I guess, that's me. All right. Just want to...

We knew.

Thank you for taking the question. I guess, you guys have spoken about taking cost out in Asset Integrity and some other segments. Is there a way to quantify like how much cost cuts can you take out?

I think we'll probably look to maybe get into more of that in the next quarter. I think we're still working through a lot of our cost elements as we speak.

Got it. Okay. All right. Can you talk about like how much cash taxes you have for this year?

We're going to have approximately $25 million.

Okay. So I just wanted to think about, let's say, if I -- tell me whether I'm missing any bigger picture points. So if I take mid-point of your EBITDA, so call it $200 million and take a $35 million interest expense, call it $25 million cash tax for now, $85 million midpoint of CapEx and add back stock comp. The only thing that I don't know really is the working capital. Is there a way you can help me like how you guys think about working capital? Should we just assume it's neutral for next year or can you take out some money from working capital as well?

I would assume neutral at this point in time.

Got it. And I guess, last question, if I may squeeze in. Just one anchor part like Sean's and Mark's question. So I guess, what -- what -- my takeaway for Advanced Technology is so let's say, whatever we were thinking for third quarter earlier versus what you guys did, take half-and-half cost, so cost overruns should basically come back and help you in fourth quarter and whatever was pushed back was pushed in fourth quarter? Is that the way to...

I wouldn't suggest all of it gets pushed into the fourth quarter because you do run into capacity constraints. I mean, we already had certain levels of production in our outlook for Q4. So we're not going to add capacity just to double up on production. I mean, our contractual new dates allow us for -- make schedule without having to ramp-up activity and pay overtime and be inefficient. So we get a big chunk of that push out in Q4, but not a 100%.

That's very helpful. Thank you for taking my question.

Thanks.

Your next question comes from the line of David Smith with Heikkinen Energy Securities.

Hey, good morning. Thank you.

Good morning, David.

Yeah. Most of my questions have been asked and answered, but just following up on Kurt's first question. You know ultra deepwater rig rates have been creeping up your marketing commentary on the driller calls this week and last suggests we'll see another step up shortly. I think in the past when rig day rates were improving that gave you -- provided cover to increase in pricing on other services like ROVs. Wanted to ask if this pricing recovery under way on the rigs is helping the pricing discussions at all for drill support ROVs?

It is. I mean, we're slow -- I mean it's hard to get it, because they are still, the operator are still very cost conscious and that's part of how they're defending the offshore market. So there -- it's hard to get that out, but it definitely helps us when the rigs are moving as well. I would just say that we are always -- we're always careful about the certain percentage of our work that's already under contract. So that while price starts to move, it takes a while for that to go all the way through the system, because we really only start to realize that on the newer bid. So it's slow, but it's certainly looking -- the green shoots are starting to show up as supposed to this time last year.

Great. Thank you. And I guess one quick follow-up. You mentioned that light well intervention side and the service and rental part of Subsea Products, it sounds like that that's been a decent help versus the prior year. I wanted to ask, did you all mention which geographies that -- improvement in light well intervention activity was happening?

I think it is more in the service and rental bucket in general, not specific to light well intervention and it's been more in the Africa region. That is where we've been seeing a lot more of the activity.

Eastern Hemisphere, at least, yes.

Yes.

Great. Thank you so much. That's it from me.

[Operator Instructions] The next question comes from the line of Justin Howe with Citigroup.

Hey guys, Justin here on behalf of Scott. Most of my question has been answered, but I do have a quick question on your guide for full year net interest expenses. It looks like it's 4Q is implied to trend upwards. Is that correct when I looking at that rate and if that so -- is that run rate what we should expect kind of moving into 2020?

The implied interest expense.

Yes.

Trending up -- no. Are you talking Q3 to Q4? Are you talking year-to-year?

I'm talking year-to-year. You guys have the 2019 estimated at $35 million. So based on that, about $24 million that's come in the first nine months kind of trading upwards there.

All right. The difference between kind of 2018 and 2019 is the fact that we were constructing the evolution vessel. And so we were capitalizing interest associated with that. So when you're looking at on net basis year-over-year you will see that, but Q3 to Q4, I wouldn't say that it's increasing.

Okay. So then moving to 2020, should we expect that $35 million of basically or relatively flat?

I would say, you'd see more normalized as to the Q3, Q4 run rates.

Okay. Okay, I appreciate that. That's it from me.

Yeah, thanks.

There are no further questions at this time.

Well, since there are no more questions, I'll just wrap up by thanking everyone for joining the call. This concludes our third quarter 2019 conference call. Have a great day.

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