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Cal Dive International, Inc. (NYSE:DVR)

Q2 2013 Earnings Call

August 8, 2013 10:00 AM ET

Executives

Quinn Hebert – Chairman, President and CEO

Lisa Buchanan – EVP, Chief Administrative Officer, General Counsel and Secretary

Brent Smith – EVP, CFO and Treasurer

John Abadie – EVP and COO

Analysts

Jim Rollyson – Raymond James

Martin Malloy – Johnson Rice & Co.

Joe Gibney – Capital One Southcoast, Inc.

Operator

Good day, ladies and gentlemen and welcome to the Q2 2013 Cal Dive International Earnings Conference Call. My name is Julianne and I’m your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Quinn Hebert, President and Chief Executive Officer. Please proceed.

Quinn Hebert

Okay, thanks. Good morning, everybody. Welcome to Cal Dive’s Second Quarter 2013 Earnings Call. This morning, Brent Smith, our Chief Financial Officer, John Abadie, our Chief Operating Officer, and Lisa Buchanan, our General Counsel are with me today.

To follow along on today’s call, the presentation can be found on our website at www.caldive.com and it’s under the hot button Investor Relations. If you turn to slide 2, Lisa has a cautionary statement for us. Lisa.

Lisa Buchanan

Thanks, 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 or 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 a 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. On slide 3 is our standard agenda. Slide 4, our custom remarks and then Brent will run us through the financial statements.

Our second quarter 2013 results show a pretty good improvement in earnings and relatively flat EBITDA compared to last year’s second quarter. During the second quarter, our international revenues increased over 60% when compared to the second quarter last year and accounted for 65% of our total consolidated revenues.

Second quarter EBITDA increased year-over-year in all of our international regions that we operate. As we previously announced, we were awarded $187 million in Mexico awards during the second quarter in addition to the $63 million award during the first quarter of this year. Additionally, we’re very pleased to announce today another Pemex contract award that was literally communicated to us on Tuesday this week for $40 million.

We don’t normally announce new contract awards on our regular quarter earnings releases, but we wanted to include it so we could talk about it today. This Pemex contract endows the procurement installation and commissioning of 3.5 kilometers of a 20-inch pipeline and associated tie-ins to an existing platform.

Now, this is all traditional work for us. The offshore construction work on this fourth Pemex project is expected to commence towards the end of the fourth quarter of this year and the remainder of the work can expected to be completed at the beginning of next year. This recent award brings our Pemex awards to four contracts, totaling approximately $290 million revenue.

With a significant portion of the offshore work for these Pemex projects to be performed during the second half of the year, we currently expect about 70% of our total annual 2013 revenues to come from international locations.

Overall, the Gulf of Mexico shallow-water market continues to be fairly sluggish during the second quarter. It was impacted by a slow start to the work season as weather persisted through April and into May.

From a more specific asset perspective, there was a significant decline results from our two derrick barges. The Pacific was in drydock for the most of this quarter this year where it’s even [ph] worked in a profitable salvage drop during the second quarter of 2012.

Also, permitting delays to salvage and decommissioning projects experienced by customers delayed projects that we had expected to start earlier for both the Pacific and our other derrick barge, the Atlantic. Despite the slow start, we do expect the two derrick barges to have a healthy utilization during the second half of the year.

Furthermore, the DSV Mystic Viking was in auto-mode during the second quarter. However, this vessel is now currently in drydock and she’ll be working on the Mexico projects starting late in the third quarter and into the fourth quarter.

During the quarter, we continued our asset sales initiative to divest non-core assets. We’ve closed on the sale of certain diving equipment and collected $1.7 million and divested Louisiana shore-based facilities for $6.1 million in proceeds. In the second quarter, we paid down our term loan by $9 million, leaving a $33 million term loan balance at June 30th compared to a balance of $132 million at June 30, 2012.

Looking forward, we expect improvements during the second half of the year compared to the same period for 2012 and into the first half of 2014 as evidenced by our backlog of $400 million, the highest level in five years. This, of course, is primarily driven by our projects in Mexico.

It’s always challenging to forecast certain aspects of our operations in the time and such and as it relates to the Gulf of Mexico spot market. But we currently expect the third quarter to be improved over last year and for the fourth quarter to be comparable to this year’s third quarter in terms of financial results for the three following main reasons.

First, the offshore work at Mexico doesn’t commence until later in the third quarter with more to be completed during the fourth quarter. Second, the Sea Horizon is expected to be idle in July and August which is our combination derrick/lay barge in Asia and should have commenced the project in September and we expect it to be busy for most of the fourth quarter.

The barge has been working in Southeast Asia and was 77% utilized during the second quarter. And then finally, the Mystic Viking, the Texas, and the Lone Star – the Lone Star’s our pipelay barge. They’ll all be completing their drive ops during the third quarter and will be busy working in Mexico starting in late third quarter.

Probably the most encouraging part of our outlook is the visibility that the Mexico work will provide for the first half of 2014. This is historically a very slow period for us and the book [ph] work will provide nice [inaudible] and for us to start 2014 fiscal year.

Further, we’ve been working in Mexico for the past 12 years, so based on experience and address the water weather patterns, we’ve looked at the historical weather patterns and seasonality in Mexico, built in a healthy weather contingency into the project troughs in schedule for our four Pemex projects. We’ll continue to actively get a number of projects to Mexico, most of which will benefit us in fiscal 2014.

Regarding the outlook for the domestic Gulf of Mexico shallow-water market, we expect the second half of the year to be improved from the first half due to improvement in season and weather. But overall, frankly, we expect it to remain a competitive diving and construction market.

If you turn to slide 5, backlog is $400 million. As I said earlier, it’s the highest quarter in backlogs since the third quarter of 2008. This $400 million backlog does not include the recently awarded $40 million contract in Pemex. The increase in backlog is due to our projects in Mexico is at a very high quality as the Mexico awards have been won at high margins in the last few years.

About 70% of this present backlog is due to perform in 2013. Geographically, about 85% of the backlog is international-based and then remain in the Gulf of Mexico.

In closing, we’re focused on executing the projects in our backlog and confident about our project in all four teams to get the job done while pursuing our asset divestiture programs to reduce our secured term debt. We’ve continued to diversify revenue base with a much lower cost structure to Gulf of Mexico.

And now I’ll turn it over to Brent on slide 6 to get into our financial statements in more detail.

Brent Smith

Thanks, Quinn and good morning everyone. Moving to the next slide, it shows our financial results for the second quarter of this year versus second quarter of last year.

As you can see, our revenues and EBITDA were relatively flat compared to the second quarter of 2012. However, our international results improved and our domestic decreased. The improvement in our international results was primarily driven by the increased utilization of the Sea Horizon in Southeast Asia and increased diving activity in Australia.

In addition, margins in Mexico improved due to our bareboat charter of the Kestrel. And it was our – during the awards with Pemex were one of the higher margin versus 2012 awards. The revenue recorded for new Pemex awards was for parent-related [ph] only.

As Quinn mentioned in his comment, the domestic results decreased primarily due to decreased activity for our two derrick barges working in the Gulf of Mexico. In the second quarter of this year, the Pacific worked on a very profitable salvage job where it was in drydock for most of the second quarter of this year.

Coming into the second quarter, we expect that all the utilizations for other derrick barge, the Atlantic and for the Pacific once it completed its drydock. However, there were several permitting delays for projects that were on the schedule. We do expect solid utilization for these two assets in the remaining good weather months of 2013.

Slide 7 shows our utilization for the second quarter of this year versus last year. The decrease in calendar day utilization for the saturation diving vessels is mainly due to the Mystic Viking being stacked during the quarter. However, this vessel is currently undergoing a drydock and will be working in Mexico starting later in the third quarter.

The decrease in the barge utilization reflects a decrease in the derrick barge activity that I’ve previously discussed.

Slide 8 shows our revenue mix between domestic and international. International revenues during the second quarter of this year increased 65% compared to the same period of 2012, again, primarily due to increased revenue in Southeast Asia and Australia.

Our year-to-date international revenues account for 68% of our total consolidated revenues compared to 43% for the first six months of 2012. We expect this trend to continue in the second half of the year and will most likely increase due to the offshore work relating to our projects in Mexico.

Slide 9 shows our debt structure and liquidity. The first bar chart shows a significant reduction we have made in our term loan since last year and over the course of the last five years. During the quarter, we sold certain assets and received proceeds of $7.8 million which we used to repay a portion of the term loan.

The pie chart on the bottom left shows our current debt structure between secured and unsecured debt. We have made a conscious effort to rebalance to include more in secured debt over last year to give us more financial flexibility, so only secured debt is included in our leverage ratio debt covenant.

During the second quarter, we executed a $20 million unsecured loan to assist with some of the upfront procurement relating to our large Mexico projects, and to ensure we maintain flexibility to continue to build large projects there.

Again, the loan is excluded from our leverage ratio covenant and our senior credit facilities. So as you can see, we are now close to 50-50 between secured and unsecured debt with the goal of continuing to repay the secured term loan. Along with the rebalance, we’ve been able to keep our cost of debt relatively low between 6% to 7% on a weighted average basis.

The bar chart on the right shows our net secured debt to EBITDA. Our ratio increased during the second quarter due to the increase in revolver activity for the upfront procurement related to our Mexico projects.

The pie chart on the bottom right shows our current liquidity situation. We had nearly $50 million available on the revolver at quarter end along with $8 million in cash. As for the upcoming end of the third quarter, we generally expect the revolver to be steady with the end of the second quarter balance would potentially be higher or lower depending on the timing of Pemex receipt.

And finally, we’ve included our non-GAAP reconciliations on the final slide for your information. And with that, we’ll now turn it over to the operator for Q&A.

Question-and-Answer Session

Operator

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

Jim Rollyson – Raymond James

Good morning, gentlemen.

Quinn Hebert

Hi, good morning.

Jim Rollyson – Raymond James

Quinn, congratulations on the backlog. That’s great to see. Can you maybe give us a little bit of color just on how you feel about pricing because last year, things were more competitive and it seems like the last conversations we’ve had about opportunity in Mexico and the margins are maybe getting a little bit better than you’d see in this – maybe some colors now that you’re up to north of $400 million?

Quinn Hebert

Yes, sure. I think the margins have definitely improved as all the other contracts were all fairly busy. And so as you expect, supply and demand lines tightened up a little bit. We’ve increased our margins and we were able, in the bidding, to include a healthy contingency for the weather that is historically occurs down there.

So we feel pretty good about the margins, in fact, and we have a lot of men and women working hard for us. And now, our big effort is to really deliver the backlog in a comfortable basis.

Jim Rollyson – Raymond James

That sounds good. Any outlook or update on kind of where other opportunities lie, both in Mexico and elsewhere in terms of what you’re seeing for bids?

Quinn Hebert

Yes, I think Mexico is very healthy and busy. We’re expecting to continue to bid – work in Mexico for the next few years. We expect this kind of level of construction work to continue as what Pemex has communicated to us. We expect Australia to be pretty strong. We’re riding between bidding for the next large L&D project to come out of Australia. And so we see those areas have been pretty busy.

And Asia is another area starting to get pretty active and get some tractions. So, we feel pretty good about the prospects there.

Jim Rollyson – Raymond James

Sounds like the Gulf Sea is the only place that’s lagging.

Quinn Hebert

Well, the Gulf is just one of those basins that it’s going to be what it’s going to be. It’s a spot [ph] market basin. So we’ve been here for 35 years. It’s cyclical and seasonal. We’ve figured out to modify and restructure our costs here to really be successful and sort of bury [ph] the buoy [ph] jack-up, drill rig kind of market which we think is what it’s going to be.

I think that the sort of unknown variable in the Gulf right now is we’ve been tracking – depending on how you calculate these property transactions, $4 billion to $5 billion in property transactions have occurred. And the last was one filled with energy. And now it’s their acquisition of Apache shelf assets. So we know there are other – some other shelf assets to be marketed.

So, as those assets get put into hands of more active Gulf of Mexico focused players, we would expect activity levels to increase offshore. And so that’s kind of, I guess, the variable that we’re trying to figure how to qualify.

Jim Rollyson – Raymond James

Good. And the last one for me, just – you talked about obviously as things start to ramp up, you get the seasonal pick up with the Atlantic and the Pacific and the Gulf and start ramping on Mexico in 3Q and then really sounds like hit its strides starting in the fourth quarter. You mentioned second half being better year over year, do you think you get back in the black on the EPS line?

Brent Smith

Oh, I mean –

Quinn Hebert

Brent, why don’t you take a shot at that one?

Brent Smith

I can answer that. I don’t want to punt on that question but it is very difficult to determine that. I think we have a good shot at being profitable in the second half of the year.

As Quinn mentioned, the Gulf business, while less of a piece of our business than before, it still is 20%, 30% of our overall business right now. And that spot market is just so difficult to forecast and that’s just the frank truth of it. But I think we have a shot. I think – we made some comments in the opening comment. I think the third quarter is going to be – we think much improved over third quarter last year, but we do have the Sea Horizons out for a couple of months and we have some of the drydocks. That’s why we made the comments.

We think third and fourth quarter have the chance to be pretty comparable. So we just have to wait and see. I wish we had a – I wish we could tell you for sure, but with the Gulf of Mexico, it’s just – it’s just not possible at this point to say for sure.

Jim Rollyson – Raymond James

Yes, understood. Thanks for the color at least.

Quinn Hebert

All right.

Operator

Thank you. Your next question comes from the line of Martin Malloy, Johnson Rice. Please proceed.

Martin Malloy – Johnson Rice & Co.

Good morning.

Quinn Hebert

Good morning, how are you doing?

Martin Malloy – Johnson Rice & Co.

Good. Could you talk a little bit about the Pemex and maybe risks that we should be aware of regarding the work down there? Are there – is it sequenced relative to other Pemex work that used to take place for these projects to remain on time and is there potential that things get delayed?

John Abadie

Sure. This is John Abadie. I’ll take that one. We’ve been working with Pemex for quite a while now and so there’s always the potential that projects could be delayed due to other contractors. We feel pretty – with the quantity of work, we feel relatively good about that, but some of our pipeline work will be dependent upon platform insulation schedules that are performed by others.

That really shouldn’t affect the profitability of work but could influence the timing from a quarter-to-quarter basis.

Martin Malloy – Johnson Rice & Co.

Okay. And then on the cashflow front, as you work – as you ramp up work for Pemex in the second half of this year, should we not expect a whole lot of debt reduction taking place second half of this year and be more first half of next year when you’d have the opportunity to reduce your secured debt?

Brent Smith

Yes, I would expect the revolver to go down some in the fourth quarter. As I said in my comment, I think what’s really going to drive it is the Pemex receipt because we have an organized [ph] – we have been making some large Pemex collections for the procurement items, et cetera.

So, the timing of which is really going to drive the quarter end revolver balance. So for now, I would assume the third quarter revolver somewhere in the neighborhood of 2Q. But now I would expect the fourth quarter starts to come down because we have collected more by then. And then to hit on your point, come down even more in the first quarter. So, generally starting to come down in the fourth quarter.

Martin Malloy – Johnson Rice & Co.

Okay. And then just one last question, any update on Cape Wind and that project?

Quinn Hebert

Sure. We have been in-house to Cape Wind to perform a portion of the offshore construction phase and we understand that they’re evaluating those bids and they’ve also – are in the process of completing their fund-raising to push the project schedule forward.

Martin Malloy – Johnson Rice & Co.

Okay.

Quinn Hebert

They haven’t communicated anything to us in terms of the outcome of the present tenders.

Martin Malloy – Johnson Rice & Co.

Okay. Thank you.

Quinn Hebert

Sure.

Operator

Thank you. You have no questions at this time. (Operator instructions) Your next question comes from the line of Joe Gibney, Capital One. Please proceed.

Joe Gibney – Capital One Southcoast, Inc.

Thanks. Good morning guys. I just have one quick question from a lowering [ph] standpoint, just trying to better understand some of the Pemex project work falling through by quarter. I know this can certainly shift with weather and timing. Your larger $129 million job you originally referenced was expected to be a little bit more weighted in 2013. You’re referencing now it’s a little bit more of a late time, third quarter starts with a lot of this work.

Could you just walk through a little bit on these three projects, excluding this $40 million one you’re just announcing today, so the $63 million, $129 million and $59 million. I’m just trying to get a little bit of a pace in terms of how that flows through 3Q, 4Q and maybe until 1Q of the next year.

Brent Smith

Sure. I think when you take the whole mix including the new project, we would anticipate completing somewhere between 50% to 60% of that work during 2013. It’s kind of the current estimate.

John Abadie

And more of that in the fourth quarter and the third quarter.

Brent Smith

Yes, and that would be weighted heavier to the fourth quarter or the third quarter.

Joe Gibney – Capital One Southcoast, Inc.

Okay. And did you commence work yet on any of your initial $63 million project or is that also embedded in the sort of late third quarter start?

John Abadie

We’ve commenced the procurement and we’ll commence offshore work with three vessels by the end of this month.

Joe Gibney – Capital One Southcoast, Inc.

Okay. Helpful –

Quinn Hebert

Yes, real quick. At a high level view, you could say we have certainly started our procurement on the projects. And then as far as offshore work, it’ll probably be a month worth in the third quarter.

Joe Gibney – Capital One Southcoast, Inc.

Okay, thank you. That helps, appreciate it.

Quinn Hebert

All right. Thank you, Joe.

Operator

Thank you. Your next question comes from the line of Martin Malloy, Johnson Rice. Please proceed.

Martin Malloy – Johnson Rice & Co.

Just a quick follow up. Could you update us about the Uncle John and how that’s doing at that – in Well Intervention role?

John Abadie

Sure. The Uncle John is currently working in Well Intervention mode. She’s been doing predominantly riser-less interventions most of 2013 with I think one tie-in job sprinkled in there. And – but she did complete a riser intervention job with a rigid riser in the early second quarter. So, she’s currently doing additional riser-less work right now.

Brent Smith

And yet for the first half of the year, she was I think, I believe, around 95% utilized. She – in the third quarter, she’ll be mostly utilized. I think she had a couple of weeks to scheduling – between schedules. But for the most part, she’ll be heavily utilized in the third quarter as well.

Martin Malloy – Johnson Rice & Co.

Okay, thank you.

John Abadie

Sure.

Operator

Thank you. You have no questions at this time. I would now like to turn the call over to Quinn Hebert for closing remarks.

Quinn Hebert

Okay, thank you everybody for joining us this morning and we look forward to the next earnings call. Have a good day.

Operator

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

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