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Cal Dive International, Inc. (NYSE:DVR)

Q3 2008 Earnings Call Transcript

October 30, 2008, 12:00 pm ET

Executives

Quinn Hebert – President and CEO

Lisa Buchanan – EVP, General Counsel and Secretary

Kregg Lunsford – EVP, CFO and Treasurer

Scott Naughton – EVP and COO

Analysts

Jim Rollyson – Raymond James

Roger Read – Natixis Bleichroeder

Stephen Gengaro – Jefferies & Company

Joe Gibney – Capital One Southcoast

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Cal Dive International Earnings Call. My name is Amy; I will be your coordinator for today. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Quinn Hebert, President and Chief Executive Officer. Please proceed sir.

Quinn Hebert

Thank you good morning everyone, welcome to Cal Dive’s third quarter 2008 phone call. Last night, we issued a press release and an 8-K and our presentation, to get access to those documents, please go to our Web site at www.caldive.com.

With me today are Kregg Lunsford, our Chief Financial Officer; Scott Naughton, our Chief Operating Officer; Lisa Buchanan, our General Counsel; and Brent Smith, our Director of Investor Relations and Finance.

You could turn to slide 2, Lisa has an important message.

Lisa Buchanan

Thank you Quinn. This conference call includes forward-looking statements, particularly with respect to any statements that we make regarding our earnings expectations. The forward-looking statements made during this call are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially due to a variety of factors. For information concerning factors that could cause our actual results to differ, we refer you to the risk factors described in our Form 10-K on file with the Securities and Exchange Commission. This call also includes certain non-GAAP financial measures. For reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures, we refer you to our earnings press release and the presentation slides for this call.

Quinn Hebert

Okay if you turn to slide three, our outline today will be I will give some opening remarks, touch on our outlook. Kregg Lunsford will walk us through our financial statements for the third quarter and then we will open up the phone lines for questions.

Slide four, the third quarter results really represented strong operational performance by all the men and women at Cal Dive across the board, both in the US and internationally. Except for the last few weeks of the quarter that were impacted by the hurricanes which I will address in a few moments, our third quarter results really reflect the capabilities of our integrated fleet to perform in a more customary typical market conditions. We had good solid demand from our customer base in the US and overseas and we were very pleased with the revenue, gross profit, and EBITDA levels we generated. For the quarter, we successfully performed projects in nine different countries in the key areas we targeted for expansion internationally which include the Mediterranean, the Middle East, India, Australia and South East Asia. As an update on the Horizon Cal Dive acquisition, the integration is coming along according to plan. We acquired Horizon you might recall in December of 2007. Our integration efforts are combining the Horizon and Cal Dive assets and employee populations over the past nine months. They are starting to pay off and you can see that in our financial results.

As our third quarter is rocking and rolling along in July and August, then we had a couple of big events that hit the market. As we all know by now the equity and credit markets and the corresponding impact of the macro environment hit us and almost simultaneously we had the two hurricanes, Monday September 1, 2008 Hurricane Gustav made landfall in a little bitty town in South Louisiana called Cocodrie and then 12 days later Hurricane Ike made landfall in Galveston, Ontario on September 13. I will address the hurricane impact first and then we will talk about the impact of the present economic environment on Cal Dive and what we at least at this point see what is going on with our client base.

If you go to slide five, before we talk about the hurricanes in detail, I just want to give you a little bit of background. I have said this before and I will say it again, at Cal Dive we really take no pleasure in the damage, destruction, life interruptions these hurricanes bring on. We had a number of employees, and family, and friends, and clients suffer terrible tragedies associated with these hurricanes. Honestly, our hearts go out to these families. It is not an easy time for many people. But frankly, as a marine contractor in this business, one of the things we do is fix and repair things that break offshore and salvage things that cannot be repaired. It is just what we do and we feel like we do those things pretty well.

Cal Dive after the hurricanes, all floors of our operation bases in Texas and Louisiana were damaged and took on water but we had implemented our emergency plans. We evacuated all 26 ships in the Gulf, all the men and women offshore without incident and we were back offshore within 48 hours after each hurricane. We had a number of (inaudible) how quickly we responded to their needs safely. Our response really is a testament to the commitment to client service and offshore performance that is part of the Cal Dive culture and really also a testament to the character of the men and women at Cal Dive to place the company’s interest ahead of their own families’ interest. I want to take this opportunity to thank our men and women for their dedication to the company. All of our bases as an update are operational and fully functioning.

From a financial impact of the hurricanes, due to the ongoing work that we were engaged in before the hurricanes, most of our assets were on paid standby. Although the standby rates were at a lower profitability level than the working rates, this was mostly offset with increased utilization following the hurricanes in late September. If you look at the maps, you can see that combining Gustav and Ike virtually the entire Gulf of Mexico infrastructure was hit by hurricanes’ worst winds. I think I read in one state in the north where Ike pushed more water over a larger portion of the Gulf of Mexico than any other individual hurricane in recent history. The MMS at its latest count dated October 6 of this year notes that the hurricanes primarily Ike destroyed about 54 platforms and 95 platforms additionally had sustained extensive to moderate damage. As most of the operators have until November 1, this should report offshore damage. We expect the number of down platforms to increase overall once the final numbers are tallied up. I think another important factor to note on these damages is not just the down platforms but we are estimating about 300 to 400 wells who were associated with these down platforms that need to be addressed in the salvage operations. As of October 28, I think there is a new statistic coming out today but the latest statistic showed the MMS reports about 27% of oil production remains shut in and 33% of natural gas production in the Gulf of Mexico remains shut in as a result of these storms.

Looking forward, we were already expecting a pretty busy fourth quarter in ’08 prior to the impact of Hurricanes Ike and Gustav in September 2008. I don’t really see the hurricane repair work providing significant upside for our fourth quarter results. The hurricanes did cause a lot of damage but after Gustav and Ike there really were not nearly as many uncontrolled pollution events as there were after the last set of hurricane twins Katrina and Rita in 2005. Our industry frankly is under a loss, hurricanes are part of the business in the Gulf of Mexico and our customers have been much more systematic and deliberate in their approach to clean up this time around after Gustav and Ike. We are however expecting to be busier in Q1 and Q2 of 2009 than we otherwise would have been but I don’t think we are expecting to be flat out busy during 2009 winter like we were after Katrina and Rita.

If you look at slide six, you can see that our backlog has grown to about $506 million which is a company record which we are pretty proud of. The backlog level compares favorably with December 2007 backlog level of $175 million and it also compares favorably with our backlog at the end of the second quarter this year at $484 million. You can see that although we have burnt off some backlog in the third quarter, we were able to replenish it at a pretty steady state. About one third of this backlog is to be completed in 2008 and the remainder for 2009. About $190 million or 37% of the backlog is overseas work, about 20% of this backlog is related to the hurricane repair work I discussed earlier, and the balance is new construction work. From a tendering point of view, activity levels remain pretty solid through the quarter both in the US and overseas.

Let’s talk a little bit now about the potential impact of the present credit and the commodity price environment. As you all know by now, we are experiencing unprecedented conditions and a lot of uncertainty out there and this uncertainty is coming at a time when many of our competitors, customers like ourselves are in the process of preparing the budgets for next year. So, I think we have to be honest with ourselves and admit that our visibility is going to be limited at this juncture. Although we have had a few customers announce 2009 CapEx spending budgets or impacts, it is too soon to predict with any precision what the impact the present market conditions will have on our customers upstream spending levels. We will make a few comments just directionally. It feels like our larger financially stronger clients are going to stay on track for now and then those customers I think are primarily independent who have negative or neutral cash flows are likely going to adjust their spending levels to live within their means for the foreseeable future. Having said all that, we had no major projected cancellations in our backlog although we have had a few salvage projects rescheduled to 2009 simply because we ran out of the good weather months in 2008.

At this point, it feels like the US market is going to be busy by the hurricane repair work over the next few quarters and then based on present tending levels, it looks like international markets are going to come up in pretty good shape given their longer project lead times and visibility. I will tell you we are actively talking to our clients in trying to understand better what 2009 holds out for us and once we do complete that in our budgeting process, we will of course come back to market in due course. I will tell you that I still strongly believe that the long-term outlook for our business remains pretty favorable as the need to replace oil and gas production is going to continue to drive the long-term need for our services.

Let’s talk a little bit more closer to home about Cal Dive in particular. We are built to maneuver and frankly thrive in this capital market. We are pretty quick, nimble, we have been in business for 35 years, this type of cyclicality and uncertainty isn’t new to us. Our business model relies on a relatively low debt level owned rather than chartered assets and really a low cost basis approach to business, Kregg will get into the financial details, but we will have cash reserves on hand. We are generating strong cash flow over the last six months of this year. Our $300 million revolver is virtually untapped and we have been pretty patient in terms of deploying growth capital since the horizon acquisition last year. We are able to ratchet down our CapEx spending levels and to make certain that we continue to be a strong player to service our customer needs as we come out of this consistent with that 35-year business philosophy and a lot of the prevailing economic conditions, our focus really right now is to maintain maximum financial flexibility to attempt to address the uncertainty in this market. We are going to continue to monitor market opportunities as we have done and we are going to be pretty efficient in using our capital, I think in this market you really got to stick to blocking and tackling, resist the temptation to over-react and really stay focused on execution and focused on the things that you can control.

With those remarks, I will turn it over to Kregg to go through the financial details of the third quarter. Kregg?

Kregg Lunsford

Thanks Quinn. Good morning everyone. Moving on to slide seven, we have got a summary of our financial results. Cal Dive had a record quarter earning $279 million in revenue and $92 million in EBITDA. This represents 58% revenue growth and 34% EBITDA growth compared to the same quarter of 2007 and this is driven primarily by the Horizon acquisition which we closed in December of last year. Gross profit and EBITDA margins are down on a comparative basis which reflects the integrated nature of our business now that we have added pipe lay and derrick barge capability. As we have said in the past, it is not uncommon for these large integrated contracts to include a significant procurement component which is typically passed through the client with a 10% to 15% mark up. Net margins followed suite for the same reasons along with an additional impact from increased interest expense resulting from the additional debt we incurred to finance the cash portion of the Horizon transaction.

Moving on to slide eight, here we provided our calendar day in effective utilization statistics for comparative periods. If you focus on the right hand side of the slide, you can see the dramatic increase in third quarter utilization relative to the second quarter, this is meaningful in the surface diving fleet but it is particularly significant in regards to our ten construction barges. The other notable variant is the difference between effective and calendar day utilization for the quarter. You can see there is actually not much of a variance there. This indicates that there were very few out of service days across the fleet in the third quarter. Looking forward into the fourth quarter the out of service days will effectively double compared to the third quarter.

Moving on to slide nine, our international revenues make up 29% of our total revenues year to date, this represents a 7% increase year over year and a gross dollar increase of $72 million. We should come in between 25% and 30% by year end. You may remember we have previously anticipated international revenues for the year to be between 30% and 35% for the year, this was based on our initial expectation to have some revenue contributed from the Mexican market, as some of you may be aware PMEX has been slow in awarding contracts and much of the work that was anticipated has sled into 2009. So, we do not anticipate now having any revenue contributions from Mexico in 2008.

Finally, moving on to slide ten, this slide certainly has become more important in light of what we have been experiencing over the last several weeks. It’s definitely times like this when you (inaudible) that financial flexibility has been a part of your culture and your growth strategy. As you can see our net debt to book cap stands at 32% as of September 30 and we have almost full capacity under our $300 million revolver available to us. We have been proactively engaged with the lenders in our credit facility over these last weeks and we feel relatively good about their respective financial strength and liquidity. As a result of these discussions and meetings, we have no reason to believe that anyone in our bank group would have any problems funding commitments under our revolver. We don’t have or foresee any issues whatsoever in terms of violating any of our debt covenants. But probably more important, we have really good visibility into our cash flows going forward. It is supported by the backlog that Quinn covered and the strong demand for our services that we are currently experiencing. Based on this, we expect to be able to meet our cash requirements for the remainder of this year and through 2009 from internally generated cash flows. Obviously Quinn alluded to the fact that it is too early to know exactly what effect these current events might have on our activity levels next year but sitting here today we feel very good about Cal Dive’s financial position and strength.

With that we will open up for Q&A.

Quinn Hebert

Okay, operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Jim Rollyson from Raymond James. Please proceed.

Jim Rollyson – Raymond James

Hi, good morning guys.

Quinn Hebert

Welcome Jim.

Jim Rollyson – Raymond James

You talked a bit about the hurricane work which as you mentioned is unfortunate for some and fortunate for others. You happened to be in the fortunate category. Can you talk a little bit about what you are seeing in terms of pricing? If you go back and look at Katrina and Rita, obviously it caused a pretty nice little boom in the Gulf of Mexico for a couple of years and you saw prices pick up certainly in certain things like saturation diving, can you kind of share what you are seeing so far on that front?

Quinn Hebert

Sure, Jim this is Quinn. I think we have sort of said during the hurricanes Katrina and Rita we set a new sort of plateau for saturations that I think which is the most complicated and most sophisticated part of the diving spectrum and we have maintained that plateau before, during and after the hurricanes and we are still at that level. I think what we saw after the hurricane inspection work tail off, the pricing for the shallower water surface diving fleet the smaller 110 came off a little bit and now I think after the hurricanes we have gone back into hurricane inspection mode and we see those rates come up nicely. But I can tell you that the lion’s share of our EBITDA is generated by bigger assets and so that is where I think our pricing – you see that benefit in our quarter results.

Jim Rollyson – Raymond James

Sure. Is this some – Quinn do you think if last time it took a couple of years, is it something that you think is six months worth of work, 12 months worth of work, any gauge of how long from what you have seen so far?

Quinn Hebert

That’s a good question. If you look at hurricanes, I hate to make comparisons but Katrina and Rita they were about 113 down platforms between the two storms, Ike is probably right now stands at around 60% of the damage that Katrina and Rita in ’05 caused. So, you think it is going to assume in the salvage repair work that is performed at a normal rate. You are looking at about 60% of the work for Katrina and Rita. I think the big difference I said in my remarks is that after Katrina and Rita there was a much higher sense of urgency from our customer base primarily because of the pollution events. So, we saw a lot more capital deployed quicker, I think this (inaudible) our clients are going to be much more efficient in deploying their capital especially in this environment and so I think that is going to be the big difference and we are still as we said talking to our top 30 clients to try and really get a better feeling for how 2009 is going to shape up.

Jim Rollyson – Raymond James

Fair enough. Last question, you talked about bids in general were reasonably strong during the quarter, I think you mentioned that you had not seen any cancellation of projects but how is bidding going today still so far looking like these longer lead time projects internationally are still planning on going through what you see?

Quinn Hebert

Yes. So far I think last quarter we have about compared to this quarter about 10% increase in overall tendering activity levels.

Jim Rollyson – Raymond James

Great, sounds pretty good, thanks.

Quinn Hebert

Thanks.

Operator

Your next question comes from the line of Roger Read with Natixis Bleichroeder. Please proceed.

Roger Read – Natixis Bleichroeder

Hi, good morning.

Quinn Hebert

Hi Roger.

Roger Read – Natixis Bleichroeder

I guess a couple of questions, one that goes together, pricing increases on the non-sat diving vessels and I guess service diving lines and how that might impact the first-half of ’09 as you look compared with the first-half of ’08?

Kregg Lunsford

The surface diving assets, it probably increased 10% in rates since the hurricanes. What we are clearly seeing from the clients is we don’t expect a lot of first quarter activity on the surface diving side like Quinn mentioned without the priority of the pollution events. Our clients were clearly very well prepared for these storms. You see it in their response prior to the storms and the reactions in getting back out there. So, it is a nice shot in the arm short term but not that significant for our budget approaches next year.

Roger Read – Natixis Bleichroeder

Any pricing on pipe lay side or anything, has that been impacted at all?

Kregg Lunsford

That’s pretty much our flat line for right now.

Roger Read – Natixis Bleichroeder

We are all participating very aggressively and we hear about a lot of third-party pipeline damage being the main reason or at least one of the main reasons that lot of this oil and gas doesn’t come back on line, are you active there or not active?

Kregg Lunsford

Yes, we are working on three major re-routes right now and you know the utility boats out there are doing the inspection parts, just many, many clients are planning their repairs and re-route activity for exactly that, restarting the production as quickly as possible.

Roger Read – Natixis Bleichroeder

So would that indicate construction barge utilization in the fourth quarter should be above the 70% we saw in the third quarter?

Quinn Hebert

No, I think 70% is a pretty good level, because I think in the fourth quarter you are going to have holiday interruptions and that is really when the winter weather starts to pick up.

Roger Read – Natixis Bleichroeder

Okay. Then maintenance CapEx if you look at ’09 and assume that flat to down wherever things ultimately end up shaking out but what do you see that as Kregg?

Kregg Lunsford

Did you say for ’09?

Roger Read – Natixis Bleichroeder

Yes, what do you think or just on an annual basis whether it is ’08 or ’09, what is sort of a standard maintenance CapEx level?

Kregg Lunsford

Standard is going to be $50 million to $60 million.

Quinn Hebert

Right.

Roger Read – Natixis Bleichroeder

Okay, that’s it for me, thank you.

Quinn Hebert

Thank you.

Operator

Your next question comes from the line of Stephen Gengaro with Jefferies & Company. Please proceed.

Stephen Gengaro – Jefferies & Company

Thanks. Hi gentlemen.

Quinn Hebert

Hi.

Stephen Gengaro – Jefferies & Company

Just a couple of questions the first being you didn’t I don’t believe said anything about your prior earnings guidance and I think given what you have said at the end of the last quarter, it sort of suggests a $0.20 to $0.50 fourth quarter which is a pretty wide range, do you have any comments on that?

Kregg Lunsford

Steve, as you know, as we said also over the last couple of quarters, we anticipate earning the lion’s share of our profits in the last two quarters. So, there is still a lot of variability even in this last fourth quarter. So, we are not inclined right now to narrow that range, as a policy we don’t do that. There is still potential for significant weather disruption if weather kicks up sooner this fourth quarter and again there is a lot of uncertainty with our customers. You guys are starting to learn how business can turn on and off overnight and if our customers decide to preserve capital especially in light of what is going on in the markets right now and shut it off earlier, you can definitely see – it is actually reasonable or possible for us to hit into the high end or low end of our range still based on fourth quarter activity.

Stephen Gengaro – Jefferies & Company

Have you seen any loss of momentum in October versus the third quarter?

Quinn Hebert

No, we are still busy doing both hurricane repair work and previously scheduled new construction projects that we interrupted in September.

Stephen Gengaro – Jefferies & Company

But you do tend to get a little seasonality?

Quinn Hebert

We will get some seasonality as we get closer to Thanksgiving and Christmas holidays.

Stephen Gengaro – Jefferies & Company

Thank you and then my second question has to do with where you stand from a debt maturity perspective, can you give us kind of an update on any big maturities that are coming due and how you plan to attack them?

Kregg Lunsford

Sure. We have under our term loan which is $335 million outstanding as of September 30, has a $20 million a quarter amortization. So, we will pay those each quarter as they come due. We have nothing drawn on our revolver. Both of those were – the revolver is a five-year facility that we set up starting with the Horizon transaction last December. So, anything we do now would not be due for another four years.

Stephen Gengaro – Jefferies & Company

Okay, that’s helpful. Thank you.

Kregg Lunsford

Thank you.

Operator

(Operator instructions) Your next question comes from the line of Joe Gibney with Capital One Southcoast. Please proceed.

Joe Gibney – Capital One Southcoast

Good morning everybody.

Quinn Hebert

Hi Joe.

Joe Gibney – Capital One Southcoast

Just want to do a follow-up on sort of when is your extension here on the Uncle John, Quinn if you could just give us an update here on how you think about spot versus term mix within your fleet, obviously now you are getting more color working with the orientation but help us think about that a little bit relative to fleet deployment.

Quinn Hebert

Sure. I think we were pretty pleased with the Uncle John got extended for another year for a major. I think as we go through and look at the clients, there is going to probably be some additional commitments coming out of the hurricane repair work similar to what we saw with the Uncle John. I think the balance between hurricane repair work and new construction work, what was it Scotty, for the quarter?

Scott Naughton

In the third quarter, new construction was 50%.

Quinn Hebert

Right, so we are about half way and I think that’s where we will stay going forward. With the Horizon assets we are more exposed to the pipe lay large diameter repair work and the derrick barge work. So, does that answer your question?

Joe Gibney – Capital One Southcoast

It does. That’s helpful, thank you. Kregg on the CapEx side, you mentioned some flexibility here, you guys are monitoring the market opportunities, I appreciate the color on the maintenance CapEx, what is the acquisition market looking like now, this is a market environment that maybe does present some more opportunities than it did even six months ago, so some color there would be appreciated thanks.

Kregg Lunsford

Sure. The first thing I think of being in this market right now is there are some great opportunities. You just can’t go get any financing and do anything outside of what you have actually got, they are all locked up. So, we are certainly still coming in the market and looking to be opportunistic. We do have some dry powder within our facility and we have got like I said strong visibility with our operating cash flows. We would be lent obviously by the amount of capital that we have access to within those two means from discussions. In addition to while we have got comfortable with our lending group that we have got no problems with our existing commitments they are all very clear that in the near term there won’t be any new financing available to most of us. So, I guess that is sort of the landscape right now. We will continue to look and see as the potential evaluations come down and if things fall within our strategic focus and within something that we are comfortable financing within our existing facility, we would certainly look at that very hard.

Joe Gibney – Capital One Southcoast

Right. It is possible if I missed it but the CapEx for the quarter here in third quarter and your expectations in fourth quarter now, are we still going to be in that 100 kind of bandwidth for the year?

Kregg Lunsford

For the year, I think we are going to come out around $120 million, $115 million to $120 million which I think we had earlier in the year said about $100 million and on top of that we have added – as you guys know we acquired one of the portable saturation diving systems out of Superior bankruptcy. So, that is how we get up to the $115 million model.

Joe Gibney – Capital One Southcoast

Okay, and it ended up still the expectation of ten portable sat units by the end of the year, is that correct?

Kregg Lunsford

We will have ten available by the end of the year.

Joe Gibney – Capital One Southcoast

Okay. Thanks guys, I appreciate it. I will turn it back.

Operator

You have no further questions at this time.

Quinn Hebert

Okay. Thanks everyone for your interest in Cal Dive. We are working hard for our shareholders and our customers and we look forward to the next call. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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