Cal Dive International, Inc. Q4 2008 Earnings Call Transcript

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 |  About: Cal Dive International, Inc. (DVR)
by: SA Transcripts

Cal Dive International, Inc. (NYSE:DVR)

Q4 2008 Earnings Call

February 18, 2009 12:00 pm ET

Executives

Quinn Hebert – President & CEO

Kregg Lunsford – CFO

Scott Naughton – COO

Lisa Buchanan – General Counsel

Brent Smith – Director of Finance

Analysts

Roger Read – Natixis Bleichroeder

Jim Rollyson – Raymond James

Joe Agular – Johnson Rice & Company

Joe Gibney – Capital One Southcoast

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter 2008 Cal Dive International earnings conference call. (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

Welcome everyone, welcome to Cal Dive’s fourth quarter 2008 and full 2008 earnings call. With me this morning is Kregg Lunsford, our Chief Financial Officer; Scott Naughton, our Chief Operating Officer; Lisa Buchanan, our General Counsel; and Brent Smith, our Director of Finance.

To follow along on our presentation, you can find the presentation at our website at www.caldive.com. Going to the second slide with an important message from Lisa.

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 we turn to slide three, we are going to go through our normal agenda where I’ll give some opening remarks, Kregg will walk us through the financial results in a little more detail, and then we’ll open up the phone lines to questions and answers.

Slide four just gives you a glimpse of what I’ll talk about, I’ll try to be brief, 2008 has turned out to be a record financial performance year for Cal Dive. Looking back at 2008 by quarter, the first quarter and a half of 2008 started out slower then we originally expected due to unusually harsh winter weather conditions and probably some customer spending fatigue from 2007.

Our activity levels really started to ramp up at the end of the second quarter and then we really hit our stride in the third quarter and then as you can see we closed out the fourth quarter, the final quarter in the year with really strong operating and financial performance.

With the acquisition of the Horizon Offshore assets in December, 2007, we felt that by adding those assets, the pipe laying and [derrick] barge assets, with our legacy diving assets, we’d offer the client base a superior construction solution on an integrated basis. We also believed that that combined fleet would drive utilization for each other and increase our overall profitability.

As you can see from our 2008 full year results we’re pretty gratified that our clients has responded positively to this strategy and our 2008 fleet utilization and the financial results reflect the success of this strategy. Before going any further, I’d just like to make a quick comment about the people at Cal Dive.

We’ve all spent a lot of time and energy to progress the integration of the combined companies forward and our results are really a credit to their hard work and determination to combine us as a unified entity. We really couldn’t review 2008 without commenting on the impact of the hurricanes. As we all know by now hurricane Gustav hit the gulf on September the first, Ike hit the gulf on September the 13 with Ike causing the most extensive damage with 60 destroyed platforms, 60 plus damaged platforms, 22 plus damaged pipelines, and we also estimate 400 to 600 wells associated with the damage still needs to be addressed.

At Cal Dive we really didn’t feel the full force of the hurricane related specs and repair activity until the fourth quarter of 2008, post Ike, our client base really acted much more deliberately and systematic taking the lessons that they learned from Katrina and Rita in 2005 and applying them to their Ike recovery efforts.

As a result they’ve deployed their capital more efficiently. And although the hurricane event from Ike did cause a lot of damage, we still didn’t see as many uncontrolled pollution events as we did after Katrina and Rita. And also as we had expected, we are not performing a lot of the hurricane salvage work through the winter months.

We do expect to perform a substantial portion of this hurricane repair and salvage work in 2009 during the better winter months. Internationally our assets were fully engaged and we had another great year of solid performance. We worked profitably in over 20 countries overseas in those areas that we’ve identified as international expansion, including the Med, the Middle East, Australia, Southeast Asia, and India.

Kregg will provide some more details on our revenue break down but 29% of our 2008 revenues were international based. In particular more specific we’ve increased the international revenues from $151 million in 2007 to $251 million in 2008 which is a 66% year over year increase. This increase was driven mostly by the increased international asset base we acquired with the Horizon Offshore acquisition and also the deployment of additional portable saturation diving systems in that theater.

International markets remain a key long-term growth area for us. Our market penetration overseas has been steady and profitable. If you turn to slide five, I’ll talk a little bit about our backlog, our backlog at December 31, stands at $350 million and that compares to $506 million in September of 2008, and favorably to a backlog of $175 million a year ago on December 31, 2007.

To refresh everyone’s memory however up until we acquired the Horizon Offshore acquisition backlog [wasn’t] a very meaningful indicator of our future activity levels. And even now about 50% of our business just won’t show up in any backlog measure as that part of our business in the call outs spot [marks] in the Gulf of Mexico.

This is the business with little visibility that shows up year in and year out. Since September of 2008 we have burned off some of our backlog and out of that $350 million backlog as it stands in December, about 88% is to be performed in 2009 and the remainder in 2010 and 2011.

About 27% of this backlog or $95 million is international based and the remainder is in the US. Of the total backlog about 53% or $186 million is expected to be hurricane related work and the rest or about $164 million is new construction and RM work to be performed in the US and overseas.

Our tendering levels remain pretty active right now. We have about $1.5 billion in bids outstanding and with about 90% of those bids for international projects and customers. Looking at 2009 we frankly expect 2009 to be a tough challenging year for the marine construction business, especially in the US. Given the financial market squeeze, the recession, lower commodity price environment, and all the other sort of factors that we’re all familiar with by now, most of our customer base has announced reduced upstream CapEx spending for 2009.

Most of the upstream surveys report year on year reduced capital spending. We believe this reduced spending will equate to lower offshore activity, especially less new construction projects. We also believe that this reduction will also be partially offset by the work that we’ll do in the Gulf of Mexico by the hurricane repair and salvage work.

With the unprecedented uncertainty and volatility on many different fronts at the beginning of this year we’ve determined that its not prudent at this time to give full year earnings guidance and we will continue to evaluate this as the year unfolds. However directionally we’ll give you some color. If you take 2008 as the starting point with reduced upstream CapEx spending by our customers, and reduced levels of offshore activity, overall realistically we expect lower revenue and activity levels for us in 2009 versus 2008.

Kregg will provide some additional details on the 2009 CapEx spending and vessel out of service base. I know this is a pretty high-level basic analysis but given where we are in the market and with the uncertain future and the difficulty to quantify the impact on demand and pricing this is about all the details we’re comfortable providing at this time.

One final comment about the market that we confront today before I turn it over to Kregg, we’ve been in business for 35 years for a reason. We’ve watched bigger and smaller marine construction companies come and go. We’ve consistently excelled in a challenging market such as this one. This isn’t our first rodeo and we expect to continue to excel in this market. Our business model is based on some pretty simple ingredients, our solid offshore performance, strong customer service background, owned rather then leased, our chartered assets, a low risk approach to contracting, a low cost approach to business, and relatively low debt levels and we are able to ratchet down our spending and maintain financial flexibility.

Having said everything we still believe that the underlying fundamentals supporting our business remain strong long-term. Its clear that its been a pretty significant interruption in the economic growth but we intend to be in this business long-term and we still think there’s plenty of work to be done long-term especially offshore. I’ll now turn it over to Kregg to slide six to continue the discussion of our financial results in a little bit more detail.

Kregg Lunsford

Thanks Quinn, and good morning everyone. Looking at slide six, revenues grew 37% year over year and [inaudible] quarter over quarter for their respective periods ending December 31. Our EBITDA grew 13% year over year and 64% quarter over quarter. This growth year over year is the results of our acquisition of Horizon Offshore in December of 2007.

Our 2008 gross profit margins came in just shy of 30% for the year. This is inline with our expectations for the year as we integrated our legacy diving services together with the pipe laying and [derrick] barge business. There are often as we’ve said before procurement components within many of our integrated construction contracts that are typically marked up by 10% to 15%. The most common items being the procurement for pipe.

Moving on to our key statistic slide, here we cover our utilization by asset class for several comparable periods. First of all you can see that utilization for our diving assets was up substantially in the fourth quarter of 2008 versus 2007. However on a comparative annual basis the diving asset utilization was reasonably consistent year-to-year and even down slightly for saturation diving in 2008.

If you think back to activity levels during the past two years this makes sense. Moving into 2007 we were working full tilt on hurricane Katrina and Rita response projects as well as new construction projects that had been pushed into 2007 as a result of those storms. We slowed down late in the third quarter of that year and then remained slow for the duration of the year.

In 2008 the slowdown from the late 2007 period lasted well into May of 2008 and then we posted record third and fourth quarter results this year. Effectively we had periods of both high and low utilization for our diving assets during both years just at different times of the year.

Moving on to construction barges, its important to keep in mind that we only had two barges in 2007 and 10 barges in 2008. We ended up the year with 50% utilization thanks to a strong finish in the third and fourth quarter of 70% and 66% utilization respectively. And again the annual average was brought down because of the slow start we just talked about in 2008.

We will have slightly higher out of service days in 2009 compared to 2008 with approximately 800 days scheduled for regulatory required drydock and other maintenance. Approximately 70% of those days are expected to occur during the first half of the year. I will touch on the related CapEx later in the presentation.

Moving on, the next two slides illustrate our growth over the last five years. You can see revenue has grown in a compounded annual growth rate of 62% since 2004. EBITDA has grown in a compounded annual growth rate of 75% for that same period. There are some key drivers over that period that we can quickly touch on to refresh everyone’s memory.

In 2004 hurricane Ivan hit the Gulf of Mexico which primarily impacted a pick up in activity levels of 2005. Several items in 2005 that drove growth in the following couple of years, first as we executed on our consolidation strategy we acquired [HOG and Torch] in late 2005 and put those assets to work over the following two years. Also hurricanes Katrina and Rita hit in late 2005 and created quite a bit of work lasting well into 2007.

In 2007 as you know we acquired Horizon and as we’ve said earlier this has really contributed to our continued growth in 2008. We also touched on hurricanes Gustav and Ike which did have an impact to our fourth quarter this year. Looking ahead, there should be some additional work from those hurricanes that will impact 2009. That will have to be weighed very carefully, looking at the global economic situation that we all face and are all well aware of. That uncertainty is really what’s driving our hesitancy in coming out with guidance at this time and so we’ll just keep you posted as the year progresses.

Moving on international revenue is on slide 10, we grew our international revenues by $100 million in 2008 reaching a total of $251 million. That represents almost 30% of our total revenues for the year. As you know our long-term goal is to grow in strategic international markets and ultimately for that to make up more then half of our overall business.

Also interesting to note if you look at our international growth over the past five years, from that previous revenue growth slide, it actually represents a compounded annual growth rate of 89%. So you can see that our growth rate for international business is outpacing that of domestic. The next two slides illustrate our leverage and access to capital.

As of year-end and subsequent to our recent stock repurchase as of January 28, 2009, first let me quickly recap the stock repurchase transaction and we’ll move back to the slides. On January 28 Cal Dive repurchased and retired almost 13.6 million shares of its common stock from [Helix] our majority shareholder for $6.34 per share or $86 million. This price was based on the previous 30-day average closing stock price at a 2% discount.

Following the transaction [Helix] owned 48 million shares of our 94.3 million shares of currently outstanding common stock or just under 51%. We borrowed $100 million under our revolving credit facility to fund this purchase and intend to use the remaining $14 million for working capital and general corporate purposes.

Moving back to the slides now, the primary difference between the two is driven by the $100 million balance outstanding under the revolver on January 28 and to focus on the most recent relevant information let’s look at slide 12. Following the transaction we had a net debt to book cap ratio of 34%. We had $193 million of availability under our $300 million revolver and we also had $95 million of cash on hand so that was almost $290 million of total available capital following the transaction.

Looking forward from a cash perspective our requirements include required debt payments on our term loan of $20 million a quarter, the interest expense on our debt which is at LIBOR plus 225, expected CapEx of $70 to $80 million this year, and cash taxes which are reasonably close to book taxes and are in the low 30% tax rate.

With that I’ll hand it back to Quinn and open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Roger Read – Natixis Bleichroeder

Roger Read – Natixis Bleichroeder

Regarding your comments about the blend of work and the outlook for spending, could you take a bit about the blend between IRM versus construction work and the potential impact on margins in the first half of 2009.

Scott Naughton

As far as pricing goes, we are seeing our pricing holding on all of our saturation assets and utilization is staying very strong. We have certainly seen some downward pressure with the winter months on our surface diving and shallow water pipe lay activity. We finished up last year with about a 50/50 split between new construction and hurricane repairs wrapping up our typical inspection and repair type market within those numbers also and right now on our backlog we see a higher percentage of hurricane activity for 2009 but with seasonality catch up that will balance out. And I would also lump the derrick barges in with our sat assets utilization and rates are staying very solid.

Roger Read – Natixis Bleichroeder

As you talked about $1.5 billion or so of bids outstanding, could you give us a general sense of what the regional profile might be there, are things increasingly gravitating to international waters as things slow down in 2009 in the Gulf.

Scott Naughton

That’s a nice split between southeast Asia and the Mid East and we’re also seeing activity, bidding activity picking up in Mexico.

Kregg Lunsford

I think we said earlier the international share of that bidding activity is over 90%.

Operator

Your next question comes from the line of Jim Rollyson – Raymond James

Jim Rollyson – Raymond James

If you look at some of your thoughts on, you mentioned obviously that diving is going to remain probably strong presumably construction is a little lower, but if you think about the CapEx slowing down on the new construction side, and the hurricane work helping pick up some of the slack and maybe with the outlook for drydocking days which I think you said 70% was first half, how do you think about the first half of 2009 relative to the first half of 2008 because obviously you started off 2008 pretty slow and then when you started getting into season, things started to pick up and then helped out by the hurricanes later in the year, you think you have a little bit of head of steam on the hurricane side where first half of 2009 is better.

Quinn Hebert

If you look at year over year our out of service days are about flat so that’s kind of a wash. Right now I’m not a weather forecaster and last year we had unseasonably bad weather for the first five months of the year. We do see a little bit more momentum from the hurricane work in Q1 and maybe leading into Q2 of 2009 versus 2008 but I wouldn’t put a whole lot of credence to that.

I think we’re just kind of waiting to see how the first two quarters unfold.

Jim Rollyson – Raymond James

As a follow-up maybe looking at the repurchase that you completed here last month, thoughts on how you feel about CapEx or I should say acquisitions, that’s been a big part of your long-term growth plans, is acquiring guys internationally. You’re a little more levered then you were, still not a lot but just kind of how you are thinking about that in today’s market.

Quinn Hebert

Well first of all the repurchase was from [Helix] it was at an attractive price that was accretive. You had a willing seller and a willing buyer and we thought it was a great transaction for the company and our shareholders. I think since the Horizon acquisition we’ve kind of beat this drum about being patient in the market because at Cal Dive we’re not known for paying full retail prices of bringing assets, I think that’s going to come back to help us and serve us well as we see what the international asset base shakes out with this global credit crisis. And so I think we’re still looking at a transaction, we still have room to do things but I think right now we’re still going to be a bit more patient.

Jim Rollyson – Raymond James

Does it sound like there’s deals out there and are prices getting a little bit better, starting to.

Quinn Hebert

Yes, there are deals out there. We just feel like the prices are still out of whack in terms of employing those assets on a [inaudible] basis so we’re going to still be patient. We’re happy with doing that right now.

Operator

Your next question comes from the line of Joe Agular – Johnson Rice & Company

Joe Agular – Johnson Rice & Company

I was just wondering the gateway project, that was completed or—

Scott Naughton

Northeast gateway is actually the L&G pipeline that was completed in 2007 prior to the Horizon acquisition. We did successfully complete the Suez L&G project, the 2008 work scope wrapped up in October last year. We will have two sat spreads back up there in the summer months to complete the final [columns].

Joe Agular – Johnson Rice & Company

Okay so you have something upcoming this summer.

Scott Naughton

Yes.

Joe Agular – Johnson Rice & Company

I just thought there may be, is there a prospect for any other additional work up there beyond that?

Scott Naughton

Absolutely, we’re very interested in some of the planning that’s on the boards right now in that area.

Joe Agular – Johnson Rice & Company

Going back to the international bidding activity comments you all have made, could you put that in context of where your vessels are right now, are you positioned in those markets already where you’re seeing the bids or is this something that if you are landing jobs you may have to mobilize vessels to other markets.

Scott Naughton

No, you’re absolutely correct, those assets are right in those areas where we’re seeing activity. We have dive boats in the Mid East and our barge is working in India right now, the Sea Horizon.

Joe Agular – Johnson Rice & Company

Okay so most of this bidding activity you are doing in those areas where you are kind of currently active.

Scott Naughton

Absolutely.

Operator

Your next question comes from the line of Joe Gibney – Capital One Southcoast

Joe Gibney – Capital One Southcoast

Just wanted to follow-up a little bit, any additional progress on some other term contract work in the US Gulf of Mexico following on what you secured with the [inaudible].

Quinn Hebert

I think our backlog includes everything that we have booked which stands at $350 million and we’re still actively tendering work in this area. So nothing new to report on that front.

Joe Gibney – Capital One Southcoast

What was the percent of backlog expected to burn off here in 2009, was it 88, is that correct.

Quinn Hebert

Yes, 88%.

Joe Gibney – Capital One Southcoast

And just to your outlook I know a lot of moving parts and considerations for where we go on activity and top line for 2009, is it still your targeted goal to be looking for a 30% gross margin level again here in 2009, is that a fair question.

Kregg Lunsford

I think that would certainly be a targeted goal. I think if you look at our outlook a year ago, we said the high 20’s was what we were shooting for so we actually beat our goal this year so we’re probably going to have a similar goal with the high 20’s and hopefully beat that target.

Joe Gibney – Capital One Southcoast

On the share count expectations for the first quarter given the timing of the buyback, what are you modeling there.

Quinn Hebert

About 94 million shares.

Kregg Lunsford

Are you looking for our weighted average—

Joe Gibney – Capital One Southcoast

Yes your weighted average, when did that actual buyback close in the quarter.

Kregg Lunsford

It was January 28th so we’ll have a month at the year-end share count and then two months at the 94 million-share count, 94.3 million to be exact.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Quinn Hebert

I appreciate everyone’s interest in Cal Dive International. We look forward to our next call with you. Thank you very much.

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