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Executives

Quinn Hébert – Chairman, President and CEO

Bruce Koch – EVP, CFO and Treasurer

Scotty Naughton – EVP and COO

Lisa Buchanan – EVP, General Counsel and Secretary

Analysts

Jim Rollyson – Raymond James

Roger Read – Natixis

Joe Gibney – Capital One Southcoast

Terese Fabian – Sidoti

Cal Dive International, Inc. (DVR) Q1 2010 Earnings Call Transcript April 29, 2010 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Cal Dive International first quarter 2010 earnings conference call. My name is Maria and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s conference, Mr. Quinn Hébert, President and Chief Executive Officer. Please proceed.

Quinn Hébert

Thank you, operator. Good morning, everyone and welcome to Cal Dive’s first quarter 2010 earnings call. With me this morning, Bruce Koch, our Chief Financial Officer; Scotty Naughton, our Chief Operating Officer; Lisa Buchanan, our General Counsel; and Brent Smith, our Vice President of Finance.

To follow along in our presentation this morning, the presentation can be found at our website at www.caldive.com under the Investor Relations hot button. If you turn to slide two, our General Counsel has some opening remarks.

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 the 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 Hébert

Okay. If you turn to slide three, our outline this morning, I'll say some remarks on the quarter and review the backlog. Then Bruce Koch, our Chief Financial Officer, will review the 2010 first quarter financial results in a little bit more detail. And then we will open up the phone line to Q&A.

Turning to slide four, a summary of the first quarter results. I'm very disappointed in our first quarter 2009 – 2010 results rather. The results don't reflect the hard work and dedication of our men and women, both onshore and offshore. Frankly, the first quarter in any given year is typically slower than the other three quarters due to seasonal and winter weather factors. And the first quarter of 2010 has been one of the slowest quarters we've experienced in many years.

The spot market in the Gulf of Mexico changes quickly as that's the nature of the market. Nonetheless, although we are faced with a market that's sometimes difficult to decipher, frankly we should do better. We attribute the lack of activity, especially in the Gulf of Mexico in the first quarter to a number of factors including the lag effect of decreased offshore drilling in '09, a reduction in hurricane repair work as compared to the highest levels we experienced in the first quarter of '09, and our customers' general uncertainty about the economy and regarding North American market gas prices.

As a result of these factors, among others, our vessel utilization and day rates were significantly reduced in the first quarter. For example, our saturation diving vessels and our construction barges, the assets that generate the lion's share of our profitability, experienced a strong decline in effective utilization levels and when they did work, they worked at lower day rates.

Internationally, the Sea Horizon, our combination derrick/lay barge is in a scheduled drydock and we managed one small project offshore for one of our DSVs. By comparison, in the first quarter of '09, we had two major projects offshore last year in India and Libya.

In the face of these tough market conditions, we are focused on cost control, tendering, customer service, and solid safe project execution, things that we can control. We have an experienced management team, we've gone through this type of market before, and we know how to maneuver in this market.

If you turn to slide five, I'll give you a little bit of color on our backlog. We have $191 million in backlog at the end of first quarter, which is a small improvement over the backlog of $183 million at the end of last year. We are especially pleased with having won a portion of Chevron's Gorgon project offshore Australia. We will be working as a subcontractor to provide diving support services in the shallow water portion of this project. The majority of this project is to be performed in the fourth quarter of 2010. Of this $191 million backlog, about 80% involve the U.S.-based projects and 20% are international projects. The majority of the backlog is salvage, decommissioning work, and IMR work.

We have about $1.8 billion in total bids outstanding. Over last year, our total bids outstanding levels hovered around $1.2 billion to $1.9 billion range. So we are about where we would expect to be at this point. Most of these projects we are bidding on are scheduled to go offshore in the middle of 2010 and beyond. Since the close of the quarter, we've added a number of projects totaling about $42 million to our backlog. As evidenced by these recent awards, we remain active in our bidding levels.

The slow first quarter activity levels continued into the month of April, but as the weather gets back to better state in the Gulf of Mexico, we do expect to put our larger assets back to work. The market expect – conditions are expected to remain tough, however, through the second quarter. Many in our industry are expecting the recovery towards the second half of 2010 and into 2011. It feels like that's going to occur, but it will be a lumpy and uneven recovery, both in the U.S. and overseas, something we'll have to manage through as the market unfolds.

If you turn to slide six, Bruce will review our first quarter financial results in a little bit more detail.

Bruce Koch

Thank you, Quinn. Looking at slide six, we generated revenues of $57 million in the first quarter of 2010, which was down 72% compared to the first quarter of 2009. We had a net loss of $19 million or $0.20 per share during the quarter compared to net income of $12 million or $0.12 per share in the prior-year quarter. We generated negative EBITDA of $8 million this quarter compared to positive EBITDA of $42 million during the prior-year quarter.

The decreases are due to decreased vessel utilization and day rates as a result of a decline in demand for our services worldwide compared to the first quarter of '09, as Quinn outlined in his comments.

Turning to slide seven, our utilization slide, total fleet utilization – effective fleet utilization equaled 23%, down significantly from the prior year's utilization of 58%. Effective utilization for our most profitable assets decreased significantly. The SAT diving vessels decreased from 91% last year to 39% this year, and construction barges decreased from 26% last year to 6% this quarter.

Turning to slide eight, which shows our international revenue as a percentage of total, international revenues decreased for Q1 2010 by 86% compared to Q1 '09 to $13 million. This comprises 23% of our consolidated revenues during the first quarter of '10 compared to 45% last year. The decline is due to lower vessel utilization, which was 16% this quarter versus 76% in the prior-year quarter due to the factors already discussed, namely we only had one small project during this quarter compared to two larger projects in '09. In addition, the Sea Horizon was in regulatory drydock for the vast majority of the quarter.

Turning to slide nine, this slide illustrates our net debt levels and our net debt-to-book cap ratio. We've continued to reduce our net debt level since the December 2007 Horizon acquisition. At March 31, 2010, we had net debt of $162 million, which is comprised of our term debt of $215 million net of cash and $53 million on hand. Our term amortizes down at $20 million per quarter and the interest is at LIBOR plus 225 basis points. We have a net debt-to-book cap ratio of 19%, which has also been declining. As of March 31, our overall weighted average interest rate is approximately 2.6%.

And concerning our credit facility, we think we have very favorable terms. Our leverage ratio requirement is debt-to-EBITDA of less than 3.7 times and we are currently at 1.35. We also have an EBITDA-to-interest covenant minimum of 2.75 times coverage and we currently are at 11.8 coverage.

Turning to slide 10, our liquidity slide. We have total liquidity of $349 million, which has been very consistent for the past several years. That consists of – we have $296 million availability under our $300 million revolver, we have $4 million set aside for letters of credit, and we have $53 million of cash on hand. As mentioned, we have – we don't have anything drawn down on our revolver. The interest rates on any drawings would be at – it's tied to our leverage ratio that currently sits at LIBOR plus 200 basis points.

We expect to spend about $70 million during the year in CapEx, which is split about 50-50 between drydock expenditures and non-discretionary maintenance CapEx. So based upon our relatively low leverage levels, our current cash on hand, our access to capital under our credit facility, and our cash flow that we generate from operations, we think we are in a healthy position coming into '10. We also – I'd like to mention we generated about $27 million of operating cash flow during the quarter as well.

Finally, we've included our non-GAAP reconciliations on slide 12 for your information.

Quinn Hébert

Okay. Operator, that concludes our prepared remarks. If you could open up the phone lines to Q&A?

Question-and-Answer Session

Operator

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

Jim Rollyson – Raymond James

Good morning, guys.

Quinn Hébert

Hey, good morning, Jim. How are you doing?

Jim Rollyson – Raymond James

Not too bad. Well, I guess starting off, Quinn, backlog actually went up a little bit. That's a good sign and it sounds like bidding remains still fairly healthy over the last couple of quarters. When do you think some of the bidding might actually start to turn into awards? I mean, I guess I was thinking we might start to see that by now, but are you thinking the next few months we'll start seeing awards and maybe pick up a little work second half and then kind of 2011 improving from there?

Quinn Hébert

That's how it feels like. I mean, if you look at just in April, we picked up $43 million in awards that's spread over around 15 or so projects. But we are bidding pretty actively right now. I mean, I think the second quarter, we are expecting to be much better than the first quarter. And the third quarter is always our best quarter. So things should pick up.

Jim Rollyson – Raymond James

And relative to your commentary about just this year being challenging compared to last year, how are you thinking about the fourth quarter, because you typically drop seasonally in the fourth quarter, but are you thinking fourth quarter starts to turn that year-over-year trend around?

Quinn Hébert

I think the fourth quarter for every year is the X-factor quarter. It's the most difficult to predict, it's the least visible at this point end of the year and it depends on the customers' spending habits towards the end of the year and if and when the winter weather picks up.

Jim Rollyson – Raymond James

Okay. We'll stay tuned for that. And I guess the last question, just so other guys can talk, oil spill going on in the Gulf impacting your operations, any work from it, any kind of work stoppage from it, just what are you guys seeing there?

Quinn Hébert

Sure. Well, first of all, I just think it's real terrible what happened (inaudible) and I think everybody in the industry feels pretty bad and it's a reminder of how difficult it is out there offshore for our men and women. But we do have one small utility boat working in the sort of the cleanup (inaudible), but that's about it for us.

Jim Rollyson – Raymond James

And no impact on other operations?

Quinn Hébert

Not at this point, no.

Jim Rollyson – Raymond James

Okay. Thank you.

Operator

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

Roger Read – Natixis

Yes, Natixis Bleichroeder. Good morning, gentlemen.

Quinn Hébert

Good morning.

Bruce Koch

Good morning.

Roger Read – Natixis

Obviously, tough quarter here. Not too hard to figure out why was utilization the way it is. Just maybe, Quinn, if you can help us sort of understand how things progressed during the quarter? I mean, was March as bad as January, is April better, kind of what you are seeing in the very near term here?

Quinn Hébert

I think the way the quarter progressed, we – frankly, it was a lot worse than we expected obviously. And really the velocity and the depth, breadth of the softness was pretty rough as you can see from our results. I think April is a continuation of the softness from March, but with the work that we won in April, we look to be putting the SAT vessels and at least the two big derrick barges to work. So we feel pretty good about those prospects.

Roger Read – Natixis

Okay. And then the other thing was looking at revenues in Q1, the international revenue versus domestic, it wasn't surprising to see a big drop-off here, the big drop-off internationally. Kind of help me understand what went on internationally and as you – and since I think the backlog is more of an international-driven event, how you see that progressing as the year flows along?

Quinn Hébert

I think internationally, it's really we – we had a soft market in the Gulf of Mexico and then we got kicked in the teeth internationally. We had – we didn’t get the DSVs that were available to work, the two DSVs that we have. And the Sea Horizon last year was working on a project in India and this year she was in the drydock. So that really was a double-effect on us.

Roger Read – Natixis

So more of a shipyard issue than a lack of demand from your customers or – ?

Quinn Hébert

No, I think it's both.

Roger Read – Natixis

Okay.

Quinn Hébert

I think we had one of our big – biggest revenue earner in the shipyard and we just didn't see declined spending levels that we were expecting and then to the extent there was work out there, there was significant competition.

Roger Read – Natixis

Okay. And then I guess my next question, I was fairly impressed when I first looked at the backlog that you could pay off some of the debt and the cash stayed flat. Of course looking a little deeper, accounts receivable came down a bunch, so I guess you did a good job of bringing that in. Bruce, as you look at cash flow for the next couple of quarters, you still have the obligation to pay some of the debt down, if I remember correctly. How do you see that kind of working out here, cash flow versus cash obligations?

Bruce Koch

Well, I mean, there is no problem there. I mean – again, I think our liquidity is very solid and we have our revolver that's not drawn. We will get into our revolver during the year and – as I mentioned last quarter, and where we are with the revolver at year-end depends on how much cash we produce from operations. But we are not concerned at all from a covenant standpoint.

Roger Read – Natixis

No, no, I wouldn't try to imply that, just kind of where you were. I guess last question I'll have, Mexico has been a big slowdown for pretty much everyone. Several months ago, we would have discussed potential projects being awarded Q1, Q2 time frame. Can you kind of help us understand where that is at this point?

Quinn Hébert

Sure. I think six months ago, nine months ago, we were expecting to be bidding five to seven projects and going – actually going into the field in Q2 and Q3, that's not the case. The projects have been delayed and postponed, they haven't been pooled. And so this year, I think we are bidding two to three projects in Mexico with one to two stacked in the back half of this year and the remainder of those projects will be pushed into 2011.

Roger Read – Natixis

Okay. Thank you.

Quinn Hébert

All right. Thank you.

Operator

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

Joe Gibney – Capital One Southcoast

Thanks. Good morning.

Quinn Hébert

Good morning.

Joe Gibney – Capital One Southcoast

Just wanted to follow up on the drydock side. Where do we stand with that in 2Q? I know you guys have wanted to (inaudible) relative to the seasonal slowdown. Just what do we have in the queue for the second quarter on that front?

Quinn Hébert

Sure, Joe. I'll let Scotty answer that.

Scotty Naughton

Yes. Good morning, Joe. We are finishing up the two derrick barges. So they will both be back at work in the second quarter and we have one of the Four-Point SAT boats in drydock and when we wrap that one up, that is going to be all of our capital projects until December. So we do have the fleet poised for the summer months.

Joe Gibney – Capital One Southcoast

Okay. On the Australia side, good to see Gorgon come through, I'm curious, are there any other incremental follow-on opportunities there on the shallow water dive support side that you guys see materialize in the back half of this year? Is it more '11 now as we've gotten Gorgon into the fold?

Scotty Naughton

Well, that was certainly the first big one and we love that. We have a lot of smaller activity-type projects going on and we will – we do see that picking up later on in the year.

Joe Gibney – Capital One Southcoast

Okay. And Quinn, just kind of a higher-level question for you. As you look about 2010 here, I understand the limited visibility and the lumpy recovery is fair. Just curious how you think about your revenue mix maybe shaking out given that backdrop. I know typically it's more than 50% on the construction and install side and then the remainder on call-out day rate work and salvage work, inspection, repair work. Just as you think about back in the slow start on the barges here in the first quarter, what do you think that mix is this year? I know it's a tough number to peg down? But is that – ?

Quinn Hébert

It is. It's a tough number. I think it's fair to say there will be less than 50% construction work for 2010. I think we will be doing a lot – still a lot of decommissioning and IMR work. We are going to be bidding and competing this year pretty aggressively on the new construction work. But I think given how we started out the year, that's a fair assessment.

Joe Gibney – Capital One Southcoast

Okay. I appreciate, guys. I'll turn it back.

Quinn Hébert

All right.

Operator

(Operator Instructions) Your next question comes from the line of Terese Fabian with Sidoti. Please proceed.

Terese Fabian – Sidoti

Thank you. I have just two quick questions. One is on your international work, when you look out at it, is it completely natural gas-driven or are there areas where there is oil in the shallow water that you are looking at?

Quinn Hébert

International is more oil than natural gas-based. But there is a good mix between the two.

Terese Fabian – Sidoti

More oil, like 70% or 50%?

Quinn Hébert

Mix is hard to gauge. It varies between the countries and the regions. But I would say it's over 60%.

Terese Fabian – Sidoti

Okay, excellent. And then another question on day rates, you gave utilization numbers, can you just give us some perspective? Day rates came down, I guess, in the first quarter again over the fourth, but by how much?

Quinn Hébert

It varies by asset class. And so – and we don't really like to talk about day rates by asset class, but I would say the day rates have come down around 15% to 20% overall.

Terese Fabian – Sidoti

Okay. And saying that the first quarter is seasonally the slowest, would one expect that they would start coming up again?

Quinn Hébert

Well, what happens in our business is you first get utilization going and then – what we would expect in a normal cycle was day rates to follow. And that's just a function of old-fashioned supply and demand curves.

Terese Fabian – Sidoti

And are you seeing utilization go up?

Quinn Hébert

We are starting to – yes, in the second quarter in May, we will be seeing a large portion of our fleet, the bigger assets, going to work.

Terese Fabian – Sidoti

Okay. Thank you.

Quinn Hébert

All right.

Operator

And at this time, there are no further questions in the queue. I will turn the call back over to Mr. Quinn Hébert for final remarks.

Quinn Hébert

Okay. Well, thanks, everyone for your interest in Cal Dive and participating in our call and we look forward to the second quarter and 2010.

Operator

Thank you for your participation in today's conference, ladies and gentlemen. All parties may now disconnect. Enjoy your day.

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