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Cal Dive International, Inc. (NYSE:DVR)

Q4 2013 Earnings Conference Call

March 5, 2014 9:00 AM ET

Executives

Quinn J. Hébert – Chairman, President and Chief Executive Officer

Lisa Manget Buchanan – Executive Vice President, Chief Administrative Officer, General Counsel and Secretary

Brent D. Smith – Executive Vice President, Chief Financial Officer and Treasurer

John R. Abadie, Jr. – Executive Vice President and Chief Operating Officer

Analysts

Martin Malloy – Johnson Rice & Co.

Trey Stolz – IBERIA Capital Partners

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013, Cal Dive International Earnings Conference Call. My name is David, I’ll be 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 call. (Operator instructions)

As a reminder, the call is being recorded for replay purposes. I now like to turn the call over to Mr. Quinn Hébert, President and CEO. Please proceed, sir.

Quinn J. Hébert

Okay, good morning, everyone. Welcome to Cal Dive’s fourth quarter and full year 2013 earnings call. Brent Smith, our Chief Financial Officer; Lisa Buchanan, our General Counsel and John Abadie, our Chief Operating Officer are on the call with me this morning.

To follow along on our presentation, the presentation can be found on our website at caldive.com under the Investor Relations hot button. Turn to Slide 2, for our cautionary statement from our General Counsel.

Lisa Manget 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 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 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 J. Hébert

Okay. Slide 3 is our presentation outline, and Slide 4, is a quick summary of the fourth quarter and full year. For our fourth quarter 2013, we had our best financial quarter of the year, primarily result of our offshore work in Mexico, and our best EBITDA quarter, since the third quarter of 2011. During the fourth quarter we operated six major assets for the Pemex projects we won and we’ve completed about 60% of the awarded $290 million of worth of Pemex projects at year end. We have about 40% of the four Pemex projects to complete in 2014; which provides us with pretty good visibility especially for the first half of 2014.

Currently we are operating five assets in Mexico, as we completed the pipelay portion on three of the larger projects in January of this year. One of the projects, the fourth award that was awarded to us in August 2013, the project size is about $40 million. That project has been delayed by Pemex until the summer of 2014, due to the fact that the host platform isn't quite ready for us. The impact of this is expected to shift revenue and profit from the fourth quarter 2013 and first quarter 2014 to the third quarter of 2014. While we are managing four fairly complex projects with the number of variables in the phase of a decline and other total contractors.

We expect to continue to stay in close contact with our client Pemex to make sure our target planning is efficient as possible and we could address, resequencing of the work as it comes up from time to time in these types of projects.

As expected the U.S. market activity declined from the third quarter due to seasonal winter weather in the fourth quarter. Our customers typically could save spending during this time of year and we experienced low utilization with our domestic fleet. Pricing into the domestic U.S. market also remained pretty competitive for the fourth quarter. In Asia and Australia, we remain fairly busy in the fourth quarter with Sea Horizon working most of the quarter and our three surface vessels were pretty active in Australia.

For the second straight year our international revenues has increased and exceeded our domestic revenues, but international revenues increasing nearly 50% compared to 2012 and now accounting for 70% of our total revenues, which is a pretty good indicator of the success of our geographic diversification efforts. In addition to our present operating areas in Asia, Australia, and Mexico we've opened up an office in Aberdeen to serve our North Sea clients. We expect to begin shallow water diving in the second quarter of 2014. We are planning to start small in the North Sea and grow the business organically, so we don’t expect a big contribution from this area in 2014.

We have been pretty pleased with our clients’ reception and response in the North Sea market and look forward to build a pretty good business in this area. Overall the work in 2013 started off slower than we originally expected and has picked up momentum with the four Pemex project wins internationally from May August in 2013. Australia and Asia had pretty solid performance as we continue to monitor the next round of LNG terminal construction support work available for us in this market.

We didn’t have a great domestic Gulf of Mexico business in 2013 for number of reasons. There first of all wasn’t that much new construction pipelay activity which generates utilization for our barges and our DSV tie-ins until the tail end of the year. And there are number of Gulf of Mexico shelf property transactions, we are looking back at certain sales that are likely containing some of the spending in anticipation of these property sales. And then after the sales completed it takes a while for the new owners to assess the [indiscernible] of the properties and firm up their CapEx and OpEx spending plans.

All these factors combine to reduce demand for our service in 2013 in the Gulf of Mexico and created a competitive pricing environment. Based on early tendering activity in 2014, it does look that the domestic market is settling into a low return to the more normal spending levels, so this will unfold as we go through the year.

For 2013, we divested approximately $8 million of non-core assets to pay down our term loan, which is on top of the $27 million in asset sales for fiscal 2012. Then in the first couple of months 2014, we are off to a pretty good start as we sell an additional $7 million worth of non-core assets so far this year. In addition to the beginning of 2014, we have also taken steps to further reduce the cost associated with our Gulf of Mexico surface diving fleet, which is now an overall smaller contributor to our overall revenues by closing an operations base and headcount reductions to place us in a better position to compete more affectively in the Gulf of Mexico spot market.

If you turn to Slide 5, our backlog slide we have about $249 million backlog at the end of the fourth quarter 2013, compared to backlog of $172 million a year ago, which is a 45% year-over-year improvement. This is our highest year end backlog in five years. In our present backlog about 11% of the backlog involves U.S. based projects and 89% of our international projects. About 93% of backlog is expected to be performed in 2014, with the remainder in the outer years. Our total bids outstanding are generally inline with our historical levels.

Looking forward to 2014, I will make a few market observations. In the U.S. over the past few years, we have attempted to reduce cost and right size the business to match expected activity levels in the Gulf of Mexico. Based on what the feedback today, it appears that 2014 should be modestly better than 2013 in terms of clients spending and as the new property owners settle into their new ownership roles focusing more on oil and liquids extraction. Commodity prices would remain at a pretty healthy return level for our clients. Drilling continues to move along in 35 as 40 rig count on the shelf. And the industry is going with customers with the new pace of offshore permitting.

Nonetheless these aren’t necessarily new factors and we are not going to be counting on any significant recovery in the Gulf of Mexico. To continue to right size our cost footprint here so the Gulf we will be able to beat and we will be in a position to take advantage of any potential upside. In broader terms, we attempted to transform our business model to a more international niche model focused on higher-visibility, higher-margin work and significantly less than our overall reliance in the Gulf of Mexico spot market business.

In Australia and Asia, we have a good book of business with decent visibility for 2014. We are also managing two saturation diving systems in China, and we expect to see Horizon to be fairly active in the Asia region for 2014.

In Mexico, we remain busy completing the four projects for Pemex have already awarded to us, particularly during the first half of 2014, we’re also expecting another year of active tendering for Pemex, as Pemex is the fifth largest oil producer in the world with over 70% of their production counted from offshore reservoirs. Pemex is expected to spend upwards of $20 billion of E&P CapEx per year, throughout at least the year 2017 which is about double the average they spent per year between 2000 and 201.

At this point we tend to bid in around 6 to 10 projects worth of approximately $800 million in 2014. Some of these projects we will be able to perform in 2014 and others will likely be targeted for completion in 2015 which is typical for the Pemex tendering cycle. In summary, we just completed the second year, our international revenue increased geographic diversification efforts.

We are also taken steps to further reduce our costs or domestic service fleet to compete more effectively in the Gulf of Mexico’s spot market. We believe we’ve taken strides to reduce our reliance on the Gulf of Mexico’s spot market to focus more international growth markets that offer higher visibility and higher margin work. Although 2013 was a financial improvement over 2012 financial results but obviously not satisfied with these results, so we will continue to focus on project execution and return the company to profitability.

And I’ll now turn it over Brent, on Slide 6 to review our financial results in a little more detail.

Brent D. Smith

Thanks, Quinn and good morning everyone. Moving to the next slide, it shows our financial results for the fourth quarter and full year 2013 versus 2012 primarily driven by our activity in Mexico. Our fourth quarter revenues increased over 9% and our fourth quarter EBITDA increased to $17.1 million. As Quinn mentioned earlier, this is our best quarterly EBITDA since the third quarter of 2011. The increase in Mexico activity was partially offset by lower activity in other regions impart due to redeployment of certain assets to Mexico. In addition, we experienced harsher weather conditions in the domestic Gulf of Mexico compared with the fourth quarter of 2012.

Slide 7 shows utilization for 2013 versus 2012, the increase in Mexico activity does not show up in the construction barge utilization since the majority of the pipelay in 2013 was performed by the Samson a chartered pipelay ship and our utilization only reflects owned assets. As we complete the tie-in work relating to the projects in Mexico using Cal Dive owned assets, the utilization increase will be more evident. The surplus fleet utilization a smallest driver of our Gulf of Mexico business increased due to the combined activity of the three surplus votes we have in Australia.

Moving to slide 8, our revenue excluding the fourth quarter was $74 million international and $26 million domestic with Pemex accounting for a large amount of the international revenue. Our full year international revenues increased by nearly 50% compared to 2012 again driven by our activity increase in Mexico and our international revenue accounted for 70% of our total consolidated revenues, compared to 53% for 2012. Going forward and as part of our strategy, we certainly expect this trend to continue.

Slide 9, shows our debt structure and liquidity. The bar chart shows our net secured debt to EBITDA. While we continued with the increased revolver activity during the fourth quarter for working capital needs related to our Mexico projects. Our EBITDA also increased, which improves our overall ratio.

The pie chart on the bottom left shows our current debt structure between secured and unsecured debt with a weighted average interest rate of around 7%. In the pie chart on the bottom right shows our liquidity situation, with $47 million available at year end under our revolver and $12 million in cash.

I wanted to take this time to discuss our revolver barrowing needs going forward as we complete our $300 million Pemex projects. From a revenue standpoint, as Quinn mentioned, we have completed approximately 60% of the total contracts through the end of 2013 and we have collected approximately 30% of this revenue.

So at the end of 2013, we had nearly $100 million in unbilled related to Mexico driven by their ramp up and offshore construction during the later part of the quarter. As you know, our billings are dependent on milestone completions. There are no payment issues with Pemex as we have been paid timely on all billings submitted. So this is an issue of timing and we estimate we have over $60 million tied up in net working capital use in Mexico, which is not unusual for $300 million worth of construction contracts.

We expect this working capital to be in use until late spring and early summer, when we will have large collections coming from Pemex. Therefore, we expect to be utilizing our revolver heavily until then, with large potential fluctuations due to the size of the Pemex collections.

And finally, we have included our non-GAAP reconciliations for your information. And, with that we will turn it over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And this comes from Martin Malloy at Johnson Rice. Go ahead please.

Martin Malloy – Johnson Rice & Co.

Good morning.

John R. Abadie

Good morning.

Martin Malloy – Johnson Rice & Co.

Could you talk about your outlook for the kind of overall bidding pie for 2014 versus 2013 and your win rate? I guess specifically win rate with Pemex historically.

John R. Abadie

Sure this is John Abadie. Our win rate if you just look at historically the Pemex has been in the 20% to 25% range, we did see a spike in that based on contract values of last year, so a little over 30% of the total pie. I would say that our – I would expect our win rate going forward to be somewhere in that – in that range certainly nothing that’s changed with respect to the competitive landscape that would give us reason to think it would be any less.

Martin Malloy – Johnson Rice & Co.

Okay. And any impact from Oceanografia and what's going on there, would it be a positive for you all in terms of trouble that they're having putting bids together and what not or I don't know if you could comment on that?

John R. Abadie

Yes, I think you know – just we want to talk about Cal Dive on this call, but I think for us whenever you have oil field service business change a little bit offers us an opportunity for Cal Dive.

Martin Malloy – Johnson Rice & Co.

Okay, thank you. I will get back into queue.

Operator

Thank you. There are no questions at this time (Operator Instructions) Today, we have another question, this is again from Martin Malloy, Johnson Rice. Go ahead please.

Martin Malloy – Johnson Rice & Co.

You have got me again. In terms of the overall bidding pie, when you will look at 2014 versus 2013, could you comment about throughout all your markets whether you see it about the same, modestly increasing?

John R. Abadie

Sure, this is John again. I think if you breakdown the markets, I guess we address tan Pemex on the previous question. In the Gulf of Mexico, our win percentage based on market segments have been relatively constant over the last five years and with our diving services share being upwards to the 50% of the market – we would anticipate that to stay relatively constant for this year with a hope that the market pie is a little bit larger based on some of the improving fundamentals that Quinn mentioned in his comments.

In Australia of – I think I wouldn’t expect any major variances in our piece of the pie and then probably expect a little bit better at an age of as a result of our business in China.

Martin Malloy – Johnson Rice & Co.

Okay.

John R. Abadie

North Sea is still in its infancy. So we’re – as Quinn mentioned, we’re approaching the market slowly and cautiously but we do anticipate that to be we’re seeing if there’s a real opportunity there to capture market.

Martin Malloy – Johnson Rice & Co.

Okay. And then on the balance sheet, Brent do you expect – it sounds like first quarter probably not that much of a change in terms of net debt but second quarter perhaps a change. But generally it's later in the year that you start to see an improvement in terms of your net debt?

Brent D. Smith

Yes, I think, yes I think the timing – the timing is very variable and definitely fluctuate, so I don’t think we’ll see an improvement until I know we have right now based on the schedule which is already subject to change we’ll have large collections coming in kind of starting in late spring and to summer, so I would think by the end of the summer there should definitely be improvement on the Pemex collections, but I just want to emphasis that’s always subject to change because it is milestone driven and we are managing all four of these project kind of [indiscernible] and the same project team, a lot of the same assets sometimes it makes sense to do work on this project or maybe that doesn’t get you a milestone, but more efficient for the overall operations. So we are managing as one big pie and I think it would definitely be later in the summer before there’s significant improvement.

Martin Malloy – Johnson Rice & Co.

Okay. And then in terms of your outlook for first half 2014 and what you put in the press release, looking back to first half 2013 you had I think $3.6 million roughly in EBITDA. Is there any other guidance you can well any other commentary you can give us around how meaningful of an improvement you expect in the first half of 2014 versus 2013?

Brent D. Smith

I think you know we don’t give guidance and we want to be cautious as far as being too forward looking, but obviously we feel heard about the improvement we are going to have in first half of 2014, probably the most improvement that we have opportunity wise in the first quarter because that was easily our worst quarter obviously last year and we have this Mexico work going on. So we are very confident what we’d call significant improvement in the first half, but as far as defining that with parameters we does not really want to get into that, it’s not our policy.

Martin Malloy – Johnson Rice & Co.

Okay, thank you.

Brent D. Smith

Sure.

Operator

Thanks. Your next question comes from the line of Trey Stolz at IBERIA Capital Partners. Go ahead please.

Trey Stolz – IBERIA Capital Partners

Good morning guys, Quinn, you made the comment that bidding is now in line with historical levels and I think you've looked at it being a little below historical levels in recent conference calls or in recent years. Can you give us a little more detail on what that might imply particularly in the Gulf of Mexico with a lot of the activity occurring in heavily restructured areas already and how that’s transitioning or if we’re seeing a transition at all?

Quinn J. Hébert

I think in the Gulf, we’ve tried over the last few years, right size our business to reflect expected activity levels. And at least at the beginning now in 2014 just seems we’re actually biding on some shallow water pipelay jobs that last year, we didn’t work on the radar screen. So that’s an indication I think of we’re expecting at least a modest recovery in the Gulf of Mexico, but again we’re not really sitting here, waiting for the Gulf to recover, it’s going to be what it’s going to be and we’ve really transformed our business to try and get into these higher visibility international basins. And the Gulf is by its fundamental nature.

Trey, you know this, it’s the spot market, so you sort of take a view of the macro things that are going on and the things that we’ve identified in the last two half years, there is been about $8 billion of shelf property transactions. The big leader in that has really been the Fieldwood’s consolidation of properties and so, and these are property transactions with Gulf of Mexico focused portfolio companies for the most part. So it looks like those guys are going to be pretty active or more active than what the predecessor companies that own the properties were and they’re going to reinvest, they told us they’re going to be reinvesting that cash back into those basins. So when you look at what other companies CapEx is being spent that seems to be. I guess that’s the objective data points that we’re looking at to say there’ll be some kind of the modest recovery. Now how to quantify that, we’re just a little bit too early to tell, but bidding is in pretty good shape.

Trey Stolz – IBERIA Capital Partners

All right. And Brent talking on the working capital side and until some of those large payments come through, are there any specific projects in the interim that might need some either bridge financing or some kind of financing on the working capital side? And is that – where do you stand on taking care of that if projects present themselves?

Brent D. Smith

Yes, I think with the types of projects that you’re describing that would present themselves really would be mostly Mexico-driven. Just keep in mind, most of our other contracts don’t require near that kind of working capital because the domestic Gulf of Mexico and Australia those are shorter term, more diving-related contracts and not construction. So it’s just going to depend on the Pemex bid opportunities exactly, when the project would start, would be a big factor. How much procurement was related to that chart, that contract? What the asset availability is. So if the event arose where there was too much overlap while we’re waiting on the Pemex collections, I think obviously we would explore various alternatives which could include a lot of different things, everything from partnering with someone, project financing, and what have you. So I think obviously we’ll keep a very close eye on that and take it as it comes. But generally speaking majority of the upcoming Pemex contracts, a lot of them won’t start until second half of the year, but there could be some that start earlier. And like I said, we’ll deal with those on an as needed basis.

Trey Stolz – IBERIA Capital Partners

And with the large payments you do based on the milestones, are there additional milestones that may get in the way of between now and the summer, or are there any kind of hiccups that we should be looking at, potential hiccups, that would get in the way of furring up that working capital?

Brent D. Smith

Well, there is always a possibility of changing schedules for variety of reasons. I mean you saw in the press release that Pemex has delayed one of the projects that was scheduled for first quarter of the summer, but there is always things like that that could shift the schedule around. But right now we’re confident in the schedule we have internally. So possibility exists, but nothing anticipated.

Trey Stolz – IBERIA Capital Partners

All right, well thank you, that will do it for me.

Quinn J. Hébert

Thanks.

Operator

There were no set of questions for you at time gentlemen, so I’d now like to turn the call back to Mr. Quinn Hébert for closing remarks.

Quinn J. Hébert

Great thanks. I appreciate everyone’s interest in Cal Dive, and we look forward to talking to you at the next first quarter call. Have a good day.

Operator

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

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