My name is Jason, and I will be your conference operator. I would like to welcome everyone to Oceaneering's Fourth Quarter and Full Year 2019 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.

Thank you, Jason. Good morning, everyone, and welcome to Oceaneering's Fourth Quarter and Full Year 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, 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 are also -- 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.

Good morning, and thanks for joining the call today. I'm happy to note that 2019 is the first year since 2014, where we have seen improved consolidated adjusted operating results and adjusted EBITDA as compared to the prior year. Free cash flow also improved in 2019, the first year-over-year increase we have seen in this measure since 2015.Today, I'll focus our comments on our performance for the fourth quarter and the full year of 2019, our market outlook for 2020, our continuing commitment to capital discipline, operational improvement and expectation to generate significant positive free cash flow in 2020. And our business segment outlook for the first quarter and full year of 2020.Now moving to our results. In our press release for the fourth quarter, we reported a net loss of $263 million or minus $2.66 per share on revenue of $561 million. These results included the impact of $255 million of pretax adjustments primarily $240 million associated with asset impairments, write-downs and write-offs recognized during the quarter. Adjusted net income was $2.5 million or $0.03 per share.We were pleased our consolidated fourth quarter adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA of $48.7 million exceeded both our guidance and consensus estimates. Our fourth quarter results reflect higher activity levels, and we were encouraged that 4 of our 5 operating segments recorded sequential improvements in adjusted operating results and adjusted EBITDA. As a result of $26.6 million in free cash flow generated during the fourth quarter, our cash position as of December 31, 2019, increased to $374 million.During the quarter, we recognized certain noncash charges totaling $240 million related to impairments to the carrying value of several of our vessels and certain other assets including goodwill and intangible assets as market conditions no longer support the prior…

[Operator Instructions]. Your first question comes from the line of Vebs Vaishnav from Scotiabank.

Congratulations on a good quarter. I guess, Rod, you just brought up China couple of times. So just trying to see or trying to think through. In your EBITDA guidance, how much of EBITDA improvement, if you will, is coming from China? Or what could be addressed? Just trying to think about that impact.

It's challenging to say right now, Vebs. I mean if you look at Q1, we feel like we've sort of risked that, right? So what you see in Q1 is what we think is going to happen just for sort of the temporary work stoppages. I would say, for the remainder of the year because we have some ability to scale up and scale down. We believe it's mitigable within our current guidance range. So it shouldn't blow us out one way or the other, but we're going to have to work hard on managing the capacity associated with that work, should it slow down.

That's helpful. In Subsea Products, as you talked about, the revenue growth in 2020, mostly will come from Subsea Products. Your orders grew 60%, backlog almost doubled, but I understand there are some longer lead -- longer lead items in the backlog, if the conversion could be slow. But is there a way you can help us think about how much revenue growth -- like is 30%, 35% revenue growth for Subsea Products, a good bogey for now for 2020?

Probably more like 20%, Vebs, would be closer.

Okay. That's very helpful. And if I can sneak in one last question. So on -- in the CapEx, you have about $35 million to $55 million of growth CapEx. Can you just help us think through what is that growth Capex? And how recurring that is as we think about 2021 and beyond?

Some of it will be related to some of the work in our ST&R. So we're related to putting those assets to work for light well intervention. And the other side, I would say, would be through -- think about the new vehicles that we're putting on for ROVS. And that's pretty exciting.We may have more demand for that as we see market uptake. You think we put -- last year, we really reached commerciality on the Liberty, I think, and Isurus, they're both -- I think they're both very commercial right now. Freedom is a pretty nascent technology, and we'll get the first commercial jobs on that this year. So we'll see how fast the market uptake is on Freedom. But the first two, I think, Isurus is going to be one that would come into market fairly quickly. But again, some of that is converting current assets. So it lowers the capital requirements to get that done.

Yes, I think the one other component, Vebs, is going to be some of the things we're working on within our global data solutions group, within the digital side and software that they're working on. We'll spend a few dollars there as well this year.

Your next question comes from the line of Kurt Hallead from RBC Capital.

Thank you for all that good color and information, I appreciate that. I wanted to just kind of check in here on a follow-up on one of Vebs' questions on Subsea Products. And again, just to make sure I heard it correctly. So prospect for Subsea Product revenue to be up potentially about 20% given the order intake that you've taken through 2019. Just want to make sure I heard that correctly.

Spot on.

Yes. Okay. Thank you for that clarity. And then as you look out on the ROV type business and the expectations for lower churn, why -- and with increasing utilization, why the commentary about maybe stable pricing versus the possibility to start to see some improved pricing. Just want to get your feel for the market around that, if I could.

I think part of it is rig utilization, expected pricing, there's a sort of -- I used this joke about, we need to tell the rig marker, have the rig market tell the customers that it's winter before we can start selling winter coats. There's -- they set a lot of the expectation for budget and budget increases because we're a smaller part. And I don't believe with the ability to put some of the assets, we don't know exactly what utilization is for everybody else's assets, but I don't think we're going to be pressed for somebody to find an incremental ROV at 156 -- at 156 range.

And I think when you look at the backlog as we move into this next year, a lot of it's already work that we have bid and contracted on for this year. So most of the stuff where you'd be able to move price, would be more on the vessel market, which is the shorter duration type contracts, Kurt.

Okay, that's helpful. And then just maybe just on the capital allocation. I think you kind of made it pretty clear that you want to continue to build a very strong balance sheet kind of going towards your 2024 kind of maturities, but is there an opportunity, do you think? Why -- what is the distinct opportunity to potentially start taking down some debt or refinancing debt between, say, now and end of 2020?

I think that's something that we'll be evaluating as we go through the year.

Your next question comes from the line of Sean Meakim from JP Morgan.

So Rod, you noted your guidance doesn't incorporate any potential impact of customer decisions tied to coronavirus and the potential read-through on oil prices, of course, entirely reasonable. But could we touch on how those risks specifically could have an influence on the level of callout work that you'll see in 2Q and 3Q, just how much that callout work influences the range of your EBITDA guidance? I guess I'm just trying to gauge how customer decisions get made for that type of work. And to what extent is that portion more or less at risk of macro events, stretching great second quarter?

I think I can give you some color there. So you're spot on. I mean just like last quarter and the quarter before, the biggest part of our guidance range really falls on that callout work. And so think about the biggest part of that being projects, and most of our projects were being in the Gulf of Mexico and some in the North Sea. And we do a little bit in APAC and some of those areas. So what I -- the way I'd kind of put that is, I don't think there's a high probability of coronavirus having a significant impact on that call-out work. It would have to be a pretty hard pushdown on commodity price, where the customers are -- I mean, this early in the year, are starting to conserve capital. And then the other side would be that somehow we have outbreaks to interrupt rig activity in the Gulf of Mexico. I think that's less likely to happen. So I don't see it being a big impact on the project work near term.

We just touched on this a little bit, but within ROVs, we've been watching the offshore drillers trying to push to get more term, and they've had some success, but probably not as much as they would have liked. In that type of environment, how does that translate to the ROV business and across drilling versus vessels, just how you're trying to manage term versus price within your portfolio of contracts? I'm trying to get a better sense of beyond just kind of a static price question, trying to understand how you're managing those incremental contracts that are rolling off, as you mentioned, versus those that you've recontracted. How you're managing that churn of contracts? What you're emphasizing and what may be less important as you go through the year? I think that would be helpful.

I think you've got it, Sean, that we're kind of in that same position. Generally, our terms are matched up to the rig, so we don't get a lot of opportunity to push the contract terms. And so what we're looking at the same thing that was on longer-term contracts. We need the ability to drive price up whether it's through triggers within the contract or just overall average day rates. So we expect that we don't want to get locked into anything that's static at current rates because we do think that, again with utilization, there's an opportunity to move there. One of the things we continue to push on, when we get these contracts, is to bring more services to the rig, especially as they rollover. So -- and we're continuing to look at getting this work where we can bring the survey with the ROV, along with the IWOCS, work along with the data communications, work in the tooling work. And that integrated rig services that we've been offering, I guess, it's one of the best ways we can sort of make that case for price because we offer them the savings of less POB on board.

Got it. And then just to clarify, would you characterize the vessel market as being materially different?

No, no. I think it's very similar. And they're walking hand-in-hand as we start to see that split between utilization. We don't see any big shift between how many vessels are out there versus the drilling rigs. So the split remains pretty consistent.

Your next question comes from the line of Scott Gruber from Citigroup.

Did I hear correctly at the end of the prepared remarks that you'll provide more color on additional cost restructuring benefits on the next call?

Yes, you did.

Got it. And then just thinking about that in the context of the EBITDA guidance that has already been provided. Is there much additional cost savings embedded in that guidance? Or is it all upside from the $180 million to $220 million that you put out there?

I think it's within guidance. I think what it does -- one of the things I -- when always I colored is, I think it's definitely a pretty significant hedge against coronavirus sort of effects, if you think it that way. So all the things that have happened in the last few days, I wouldn't want to step outside of what our current guidance range is, but there's some good savings available there.

Okay. We'll wait for the color. Back on ROVs, the EBITDA margin last year was basically 30% even with a weaker 4Q given the start-up costs. And I realize there's no pricing yet, but just with an improving backdrop, why not more margin uplift in 2020?

I think some of it is going to be related to ongoing efforts to look at our cost structure, Scott. I mean some of it's going to be the regions in which we work. I mean it is going to be truly down to mix, is the primary component of where the ROV activity takes place is next year. So I think the team feels more confident at the 30% level at this point in time given what they have on their plate. And as I alluded to in my earlier response, a lot of the work on these rigs, I mean, it's already been bid. So it's not that we're moving price that much on most of these contracts currently. And that's a key component that I see right now is the vessel side. Yes, that's an area we continue to try and work on price and move it up. But I would characterize price is pretty flat right now.

I mean the -- and to give you a feel that the majority of the pricing for ROVs for 2020 is already set.

Yes, so it sounds like the volume benefit is going to get offset by some mix with pricing?

No. And we do have -- I mean, you do have to look at where you have inflation that's going to come into play. We do have cost, I mean, of employees that we have to pay. So there are headwinds associated with inflation that we have in the mix as well.

Your next question comes from the line of Ian MacPherson from Simon.

Rod, I'm not surprised that you're not really specifying a demand shock impact in your guidance broadly at this point because it's just too early. I might have thought that you would have seen it already in AdTech, just given that direct Chinese market exposure within entertainment. Can you talk a little bit more about why that is, why you haven't seen it or been able to quantify any type of impact you had that just caught me a little bit by surprise.

No, I think -- Ian, I might not have said it clearly enough. We do see that. We've had some of the projects, at least temporarily, the on the ground work, the pullback. And so we did make the adjustments. I just said, what we did have and what has come down is already baked into the first quarter. And so we'll have to see how long that persists before we talk about the remainder of the year.

Okay. So probably, since we spoke last quarter, embedded guidance for AdTech has come in a bit, and you feel comfortable backselling that a bit with your cost restructurings, and I would imagine a little bit of accretion that you've gotten from the BP Angola contract as well. Just to not to put words in your mouth, but -- so the embedded outlook for AdTech has come down a bit?

You've nailed it. I mean if we would have talked more specifically about breaking out what was going on in the first quarter, there would have been a little more AdTech in for that work and oilfield has been able to kind of fill the gap. So it's -- that is exactly what's going on.

Okay. And then the other question I wanted to ask was just on the 30 ROV retirements. Are those scrap? Are -- is that a pool of parts for lower maintenance expenditures going forward or a combination of the two or maybe something else?

Pretty much scrap.

Your next question comes from the line of George O'Leary from Tudor, Pickering, Holt and Company.

George?

Your next question comes from the line of Mike Sabella from Bank of America.

If we could kind of swing back to, I guess, sort of -- just more broadly, the state of equipment in the ROV market, you all took some opportunities to get rid of some older assets. Kind of talk to the average age of your fleet today, maybe versus where it was prior to the retirement. And is this kind of a broader opportunity that we should consider amongst the peer groups as well that we could potentially start seeing some attrition in the assets?

I've got to believe. I mean I'll just use the rig example, and I know we've had some of the rig companies out there talking about there's got to be assets out there that are going to be so expensive to put back in the business that are put back to work, but it's not really cost-effective to do so at the current pricing. So I think whether we've actually taken the fleet out or whether they're effectively out of circulation, I think there's some of that, that's already gone on.

And then kind of around -- just around the -- I guess, it was a 0.8%, 0.9% book-to-bill for 2020 in Subsea Products. Can you kind of talk to cadence around that and how we should expect it to progress throughout the year?

Yes. I think most of it is going to be more centered in the Q2, Q3 time frame. That's certain project awards are expected to be coming out and awarded at that point in time. I mean we'll have our usual base that happens throughout the year. But I mean, more of the project lumpiness that we see is more in Q2, Q3 at this point.

Your next question comes from the line of Blake Gendron from Wolfe Research.

Just one from me on the AdTech business. It was our understanding that the company is trying to standardize or rationalize it's off-the-shelf software offering in the segment to maybe mitigate some of the cost overruns that you saw on the bespoke side, maybe in 4Q. So just higher level, if you could characterize for us how much is off-the-shelf software in this business versus bespoke projects? And then maybe longer term, China weakness notwithstanding. Should we expect that maybe margins stabilize at somewhat of a higher level? And how much revenue or growth opportunity do you think you'd have to sacrifice if you were to make this concerted pivot?

So let me hit the AdTech business. That's a great question. I don't think -- we don't talk about that a lot. The software is very standard. I mean the software, generally there's a tracked vehicle we do and trackless vehicle. But within those 2 categories, they're very, very similar. We have some very standard vehicles that we put out. And again, when you think about the change of what we do, really, it's more of the variation in the vehicles than it is the software. So we do some vehicles that are small, probably 8 -- roughly 6- to 8-passenger vehicle, and then we do some larger bespoke things. And so it does, as you would expect, it gets more challenging and we start stepping out into something that's a very special form factor for a customer. And that is what was challenging in the fourth quarter. But one of the things we've done is we've kind of made some, I would say, some significant organizational changes to give better access to the broader Oceaneering for that group, so that they've got a little more support as they go into some of these businesses. So what you see in the first quarter is our expectation that we've passed that hurdle, and we're moving ahead. And again, part of that's because of the degree of completion on some of those more difficult projects. And I'm sorry, I lost the second half of the question. So if you'll remind me, the China question.

Yes. Just longer term, if you made this concerted push toward more off-the-shelf software sales. I don't know if it's a margin target or just trying to understand maybe what you would gain in terms of stability in that business versus the growth opportunity that you would potentially have to step away from and walk in line on that margin.

Sure. If I were to characterize, what happens when we do some of the other business. And I won't just speak specifically to China, but I'll talk about sort of what we would call sort of the midsized theme parks and some of the other businesses. They actually are good because they tend to be more off the shelf. They like -- they can take our base vehicle, and then they can just enhance it with what we call the creative part. They can surround it with their own body, chassis design. They can put in different video and music and themes to the vehicles. So in one sense, they become much more predictable because we're building a standard product. In the other sense, they become less predictable because you're dealing outside our -- kind of our short-range of U.S. Theme park providers and you're operating in different countries where we have to kind of cross the hurdle of importation and regulation and all the other things. So I would say those 2 things offset. I think the -- it's mostly on those other side. On the outside of our standard customer range, it's -- that's where we get more of the timing issues, probably than the execution issues.

And the issues Rod spoke about, were not on the standard product line that we were talking about where we -- as the bespoke system that we had more of the overrun on.

Understood. That's helpful color. And then just one follow-up on the BP Angola contract. I just want to clarify that, that was incremental versus the prior guidance that you gave out for book-to-bill. And then if you could just help us quantify maybe the ROV opportunity outside of that in addition to what you booked on the subsea side? And then maybe any potential follow-on work in the region, if this goes successfully?

Well, you're correct on the BP Angola work, it was incremental to the guidance we had given. And we just didn't know what time it would -- we -- if it's going to be late Q4, if it's going to be early Q1, we're confident in it. We just -- we're uncertain as to the timing of when we would book that. So it was incremental to the guidance we had given for Q4. Your other question is it related to BP Angola work on ROVs? Or is it --

Yes, you mentioned ROV work around this contract being separate, obviously in that segment. Just wondering if we could -- if you could help us quantify maybe one versus the other?

Typically two ROVs working for the duration of the contract.

So it's not going to make a big blip in the forecast for ROVs to your point.

Correct.

Your next question comes from the line of George O'Leary from Tudor, Pickering, Holt & Co.

Sorry, I was having some technical headset issues.

Glad you made it.

You guys tend to have pretty good insight into the exploration side of the market via the AUV survey business. I was just curious what you saw in the back half of 2019 and how the outlook is in 2020 for that AUV kind of survey oriented type work that might give us some insight into how exploration activity is progressing?

It was one of the better stories. So I would say that, that, again, if we don't have any big disruptions from what's going on in the world right now, that would indicate that there -- the level of activity we've been forecasting for both rigs and FIDs is on track. It also gives us a good feel that some renewable projects are moving forward. So while they're farther out, we've got -- I think we see some good renewable projects coming up in the North Sea in that and in the kind of what would be the traditional area for offshore wind. Those look good that maybe they will progress in 2020 as expected. And then the East Coast of the United States is probably beyond survey work. Anything else would happen is probably 2021 at the earliest.

And then just on the Subsea Products side of the business, 2019's strong year for backlog build and order flow. You mentioned some third-party data sources that discuss trees and E&P spending. But I'm just curious what you guys are seeing on the -- from a shots on goal perspective, from a bids and order flow perspective for 2020, just for your own -- from Oceaneering, in particular, is there an increased level of shots on goal this year, such that orders could be up year-over-year or is the base case kind of flattish? Is that kind of what's implied by guidance?

I think it's flattish. I mean that's kind of when we talk about the -- especially the book-to-bill and Alan talked about the shots on goal, to your point. We're thinking that some of these things are going to be more midyear. So we don't -- it will be kind of second quarter, third quarter or we see some of those bigger things come through. So -- but yes, the level of activity, I think, is right in line with -- we feel comfortable that we're actually seeing the things that they're talking about.

Yes. I think what you're saying is more shots on goal. They're just going to be midsized goals versus big epic game winning that we had during 2019.

[Operator Instructions]. Your next question comes from the line of Cole Sullivan from Wells Fargo.

You mentioned 20% revenue growth and products is a pretty fair expectation for 2020. Can you help us think about the kind of growth on the manufacturing side of that versus service and rentals? Particularly, when we looked at the manufacturing side in 4Q was particularly strong. Was there any lumpiness there? Or is that a reasonable kind of expectation to kind of model going forward as we progress over 2020 and throughput increases?

I think one of the things to think about is, if you remember, we were -- think about the first half of 2019 when we were under -- we were under-absorbed there. And so we have a lot of underutilized capacity. If you think about getting to more of a Q4 run rate for all of 2020. That's where a lot of that products growth comes from. It's just getting a full year of better utilization.

All right. And then on ROVs. We had a little bit of a sort of average rate improvement in the fourth quarter. And you may have mentioned something earlier and I just missed it, but -- and then some impacts on the cost side in the quarter. Can you quantify the cost impact there? And then as we look at kind of going into the first quarter, could we maintain that level of rate, and that could be mix driven, I guess, and then maybe pull back some on costs there. Is that the expectation?

Yes, the expectation is that we will get back to the 30% EBITDA margin. So a lot of that is going to be on the cost side from not having the cost to prepare the assets and put them in place to begin to work that we incurred in Q4. So that's going to be one of the big drivers in improving our EBITDA margin. As far as the increase or the lift in Q4, average revenue per day on hire, a lot of that had to do with the geography in which we operate at the assets more in rest of Africa, or the African market as well as in the Far East was a nice uplift for us in fourth quarter. Those were the two areas that propelled us.

There are no further questions at this time. I'll turn the call to the presenters for closing comments.

Great. Well, since there are no more questions, I'd just like to wrap up by thanking everyone for joining. And this concludes our fourth quarter and full year 2019 conference call. Have a great day.

That concludes the conference call. You may now disconnect.