Cal Dive International, Inc. Q2 2010 Earnings Call Transcript

Jul.30.10 | About: Cal Dive (DVR)

Cal Dive International, Inc. (NYSE:DVR)

Q2 2010 Earnings Call

July 29, 2010 11:00 a.m. ET

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

Marty Malloy - Johnson Rice & Company

Roger Read - Natexis Bleichroeder

Joe Gibney - Capital One Southcoast

Terese Fabian - Sidoti & Co.

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2010 Cal Dive International, Earnings Conference Call. My name is Erica and I'll be your coordinator for today. At this time all participants are in listen-only mode. We would be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Quinn Hébert, Chief Executive Officer and President of Cal Dive. Please proceed sir.

Quinn Hébert

Okay, good morning everyone. Welcome to Cal Dive's second quarter 2010 earnings call. With me today is 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 this mornings presentation, that can be found at our website at www.caldive.com under the Investor Relations hot button. Turning to slide two, we have a forward-looking statement from Lisa Buchanan, our General Counsel.

Lisa Buchanan

Thank you, Quinn. This conference call includes forward-looking statements, particularly with respect to any statements that we make regarding our earnings and 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. We'll go to slide three, agenda today will our normal agenda while make some remarks, talk about our backlog. And Bruce will then deliver more detail on our financial reserves discussion and then we'll open up the phone lines for Q&A.

On slide four, although we're disappointed about reporting a loss to this quarter. We do see improvement in the market from the first quarter as the weather in the Gulf of Mexico improved, our customers starts spending money there and a lot of -- most of our major assets to return to work offshore in the middle of May.

We attribute the lack of activities especially in the Gulf to a reduction in hurricane repair work as compared to higher levels in last years second quarter. The large effect have decreased offshore drilling in '09 and the general and sale need in the economic outlook and commodity prices. And the recent Macondo well blowout only increased certainly this time.

Before I go any further I just want to make a comment about the Macondo well blow, we talked a lot about it and in our industry it was a tragedy especially for 11 families that lost loved ones. So, when we talked about the blow we really talk about it with a heavy heart for those folks.

Additionally, in the second quarter in '09 there were three large construction projects that were working offshore. One in LNG project off of Boston, one China and Mexico that did not reoccur in 2010, so that impacted our 2010 results of course. As a result of all these factors, vessel utilization day rates was significantly reduced in 2010 second quarter especially when you comparing to 2009 levels, and those reduction in activity and rates hit us in our most profitable active class in the saturation diving and construction boarder.

Internationally, the fleet arrived which is our large combination deck LIBOR continue to be in scheduled dive activity in the second quarter. That boarder work almost continuously for three years non-stop. It required an extensive drive out and refitting. We're continuing to purse work for the Sea Horizon in the second half of this year.

The two VP SAT boats that we have positioned in the Eastern hemisphere went to work late in the second quarter and are working offshore right in the South China fleet and the Black Sea. As a total utilization of the assets for the second quarter this year were 50 days and that compared to the second quarter of last year they worked for over 200 days.

Obviously, the talk of our industry in the country is really impact from the oil still in the Gulf of Mexico, I wish I would say the exact long term impact for our company. There's just no way to know at this time and frankly even my information is not better than anybody else's. There are many factors that play here and the situation is obviously very dynamic.

But I can tell you is that we are performing some work related to the Macondo spill containment operations that surely is particularly offset some of the negative impact. Most of our assets are currently working offshore and expecting this upcoming third quarter to be our most profitable quarter of the year.

Slide five, we review our backlog. We have $302 million backlog at the end of the second quarter which is a significant improvement from the backlog of a 191 million at the end of the first quarter this year. Of the $301 million backlog, about 65% of our U.S. based projects and 35% are international project. About 80% of this total backlog is to be performed in the fiscal 2010 with the reminder in next year 2011.

The majority of the backlog is expecting repair and maintenance projects and salvage decommissioning project. We have filed 1.4 billion in total days outstanding. Over the last year our total bids outstanding LIBOR has range anywhere from 1.2 billion to 1.9 billion. So we're expected to be at this point.

I want to conclude by reiterating that, while there is a lot of uncertainty out there in the market we are very busy working offshore with the exception of the sea and the three boarders that we have cost back in Texas, substantially all of our major assets are working. And as stated early we expect the third quarter to be our best quarter of the year by significant margin, although from a profit point of view, the profit levels would be low within the third quarter of 2009 due to the reduced day rates that we're experiencing.

Consistent with years, the fourth quarter would be the while court quarter for us, as we don’t know when the or way the patterns of in the Gulf cost set in or when our customers start to control spending in the capital budgets. So our money conditions are expected to remain challenging. We are fairly confident our ability to moving doing this market. We've been through this before and we understand how to manage through a difficult cycle. Bruce will touch on this in more detail, but we've recently enhanced our liquidity position and financial flexibility by winning a credit agreement. And we remain focused on what things that we can control which are cost basis are tendering our customer service and our offshore project execution.

I'll now turn it over to Bruce through you the second quarter 2010 financial results in detailed, beginning on slide six.

Bruce Koch

Thank you, Quinn. During the second quarter we generated revenues of 124 million compared -- which is down 52% compared to the prior year quarter. Before a year-to-date tax adjustment we had a net loss of 7.3 million or $0.08 per share during the quarter compared to net income of 28 million or $0.30 per share in the prior year quarter. Including the tax adjustment, we had a net loss of 11 million or $0.12 per share.

We generated EBITDA of 10 million this quarter compared to an EBITDA of 65 million in the prior year quarter. The decreases are due to decreased specialty utilization in day rates as a result of a decline in our demand for our services worldwide compared to the prior year quarter, as already outlined by Quinn in his comments.

This slide also shows the calculation of net income with and without the $0.04 year-to-date tax adjustment. We recorded a catch-up adjustment during 2Q to reflect the year-to-date effective tax benefit rate of 26%. In the first quarter we had a 38% benefit rate, tax benefit rate booked. And getting that to 26% resulted in the catch-up adjustment that resulted in a tax expenses for the second quarter even though we had pre-tax income.

Turning to slide seven, our utilization slide. Total fleet effective utilization you got 50% down from the prior year utilization of 68%. Effected utilization for our most powerful asset decreased significantly, the successful decrease from 89% in Q2 '09 down to 63% this quarter. And our construction part has decreased from 50% last year to 25% this quarter.

Turning to slide eight, this slide shows our international revenues. International revenues also decreased significantly this quarter by 82% compared to last year for a total $15 million. This comprise 12% of our consolidated revenues this quarter, 31% in the Gulf. The Decline is due to lower effective utilization for our three vessels located. It was pleased our utilization was 27% this quarter compared to 84% in the prior quarter, due to the factors already discussed, namely China and Mexico pipeline project that do not reoccur and the Sea Horizon which was in the shipyard for basically the first six months of this year.

Turning to slide nine, this slide shows our net debt levels and our net debt to book to cap ratio as of June 30, we had net debt of 198 million which consist of total debt of 215 million net of cash of 17 million. With our term loan we currently have 195 million outstanding and we have 20 million to draw down our revolver as of the end of the quarter. And our net debt to book cap ratio is 23%.

Turning to slide 10, this slide go through our better facility amendment. Again we were not projecting a breach in any of our ratios. But we wanted to take this opportunity to enhance our liquidity so that we could fully use our $300 million revolver. And it also provides us more financial flexibility going forward.

You'll see on the next slide that has actually increased our capacity to use our revolver by over a 100 million as of June 30. It increased our leverage ratio covenant from 3.75 times to 4.75 times as of June 30, of '11. And then our ratio is back down to 4.25 times through September 30, 2011 and back at 3.75 at the end of 2011. We also reduced our term loan payment from 20 million to 14.8 million, provides with even more flexibility as per quarter.

The market of term loan increased for those lines as we have agreed to forgo amortization. And landed with rates our term loan went from -- about 3% to 3.2%. The price increase for the revolver increased by 75 basis points based up on our current leverage ration. And the blended rate went from 2.6 to 3.4 and that was all that.

Turning to slide 11, this slides shows our liquidity prior to the amendment we had total liquidity of 190 million you can see that performance steps amendment now has placed our liquidity is now 295 million. That consist of - and we have full access for revolver which is now 278 million of 300 million, our revolver 300 million less 20 million borrowed less 1.5 million letters of credits.

And as mentioned we have 20 million drawn on our revolver at June 30. Also we expect to spend about 70 million in CapEx and drive our expenditures during the year. And we've incurred slightly more than half of that as of June 30. So based on our current debt levels, our cash on hand and our access to our credit facility, we think we have one of the good financial position going into the busiest time of the year.

Finally if you look at final slide this our non-GAAP reconciliations for your information.

Back to you, Quinn.

Quinn Hébert

Okay. Operator we'll open up the phone lines for our questions.

Question-And-Answer Session

Operator

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

Jim Rollyson - Raymond James

Good morning, guys.

Quinn Hébert

Good morning, Jim. How are you doing?

Jim Rollyson - Raymond James

Not too bad. You're nice move in backlog, I think you mentioned 80% for this year, is that more in 3Q than 4Q? Or is it kind of timed throughout the course of the rest of the year.

Scotty Naughton

Yeah. That's -- good morning Jim, its Scotty Naughton here.

Jim Rollyson - Raymond James

Hey Scotty.

Scotty Naughton

Majority of that is third quarter and but we've got a nice backlog for the fourth quarter and we have some on the book for our first quarter of 2011 also.

Jim Rollyson - Raymond James

That's certainly helpful and I guess Quinn you made a statement about 3Q going to be your best quarter, but obviously not as good as last year. Why room between say second quarter and last third quarter loss of the right versus 35. Curious if maybe just to get a little color there, you can talk about how maybe the month of June looked relative to the month of April, just to give us a sense of maybe how well third quarter is looking?

Quinn Hébert

Sure. April really was a continuation of the first three months of the year, where we had about 22% utilization. We expect the two time activity levels in May and then we were very busy in June with most of our assets working or starting to get into that bigger projects. So that momentum from the middle of May and June is carried into July and as we expect it to continue through August and September. So we have not this, this is the first thing you do is you put your assets back to work for utilization. So that's where we are. But we still have pressure on our rate from the low activity levels can begin this year. So rates are going to be lower in '10 versus '09.

Jim Rollyson - Raymond James

Right, utilization picks back-up you think it should work to Q3 of '09?

Quinn Hébert

For not quite.

Scotty Naughton

Not quite that heavy. But we are seeing -- and you can see it by winning in our backlog we are winning our fair share that we're.

Jim Rollyson - Raymond James

Sure. On the Macondo situation, can you talk about just kind of what you're seeing as far any work that's been delayed because of that situation and maybe in the permitting side as well.

Quinn Hébert

Yeah, sure. We've had a few projects on the books that were in main pass mobile bay area that have just been delayed just because the hazards of the hydrocarbon in the area. So that's been pushed. It's unclear for us because of the uncertainty how many projects that were going to get done this or even come out on the street because of Macondo uncertainty and the drilling more towards it.

On the permitting side I think the news is mix for the shallow water guys and due to 500 feet. The permits have been very-very slow. And so it seems like the regulators have gotten their eyes across in it and holding the customer feet that far. I know only one true expiration drilling permit that was issued to the publicly held independent. They had been other permits but they were more developmental wells in the shell. But not nearly the level of course that historically we'd have expected at this point.

Jim Rollyson - Raymond James

Any prospects on the international front? You guys have obviously strived to just continue to grow that over time. Just kind of curios your thoughts -- what you're seeing there as it relates maybe to the 1.4 billion of outstanding bids?

Bruce Koch

Yeah. There's quite a bit of activity I think. I think at the beginning -- at the end of last year we were expecting a pretty good rebound in the middle of 2010, pushing us into 2011. I think with this drilling more toward them and the sort of the still lingering effects of the recession and the uncertainty about the genuineness and even as to the recovery that taking a pause right now. But our customer is still pulling out projects for us to go out and do. So I think 2011 is going to be the recovery that we are expecting are going to be stressed out a little bit longer.

Jim Rollyson - Raymond James

Alright, very helpful. I'll turn it back over.

Quinn Hébert

Thanks.

Operator

Our next question comes from the line of Marty Malloy with Johnson Rice. Please proceed.

Marty Malloy - Johnson Rice & Company

Good morning.

Quinn Hébert

Hey good morning.

Marty Malloy - Johnson Rice & Company

Could you talk about the cash usage during the quarter? How much of that was CapEx? And I guess about the free cash flow or cash flow expectations after CapEx for the second half of the year?

Bruce Koch

Sure. Our cash went down 36 million from March 31, it went from 53 million that is 17. And working capital accounted for 22 million of that just to the I've seen busier as usual with receivables going up. And we spend about 21 million in CapEx and drive out expenditures during the quarter. So then that's partially offset by our positive EBITDA, basically.

Marty Malloy - Johnson Rice & Company

Okay. And the second half of the year?

Bruce Koch

The second half of the year were I think we're going to be -- we don’t know exactly but will be into our revolver a little bit.

Marty Malloy - Johnson Rice & Company

Okay.

Bruce Koch

The expectation.

Marty Malloy - Johnson Rice & Company

Okay. And could you talk about this green turtle tool that you have on your website and what kind of impact that could have on TNA work.

Scotty Naughton

I'll handle that Marty, ratings. We're really excited about the green turtle. This is a new underwater cutting device that will be using the several well conductors below the sea floor. It's a remote control unit that self you have, some self barriers down to death and cuts the well caves. So you have seen with multiple diamond tip blades. The apparatus its self was designed by -- in all region company, Cal Dive designed the jetting and burial components and we will be kicking off our first project with the Green Turtle in August. Lot of client excitement about this unit.

Marty Malloy - Johnson Rice & Company

Okay, thank you.

Quinn Hébert

Thank you.

Operator

Our next question comes from the line of Roger Read with Natexis. Please proceed.

Roger Read - Natexis Bleichroeder

Hey good morning gentlemen.

Quinn Hébert

Good morning.

Roger Read - Natexis Bleichroeder

Real quick for you, kind of follow-up in the last question, P&A business I think we've talked before. We looked in areas that you would like to explore expanding on. Anything you can do to kind of update us along that line? Or do you simply have to wait until August Macondo still sort of blows through to have a better idea which direction you really want to go with that?

Quinn Hébert

I think we had a rate and as I can see where this -- where the regulatory prime work is going to head before we jump in. But it's something that we've looked at. As a matter of fact, I think that the early days of Cal Dive we were originally in the P&A business. So I guess if you stick around long enough life comes to a circle. But we're taking a hard look at that and see where that ends up.

Roger Read - Natexis Bleichroeder

And is that an area where you get into buying or do you think you would build internal need given that you know what the business requires. What makes more sense to you?

Quinn Hébert

I think maybe you start up small. But we're still looking at all the options available to us at this point in the market.

Roger Read - Natexis Bleichroeder

Okay. And then maybe if you could, Quinn give us an idea to understand the backlog and you mentioned this in the beginning of the call, I didn't miss the very beginning. Kind of what you see in the way of bidding, quoting activity in your international markets?

Quinn Hébert

Bidding is staying pretty steady in the $1.2 billion to $1.9 billion. Terms and conditions are tightening up and also pricing is tightening up. And so where we have to be pretty shopper about our pencils on the international front. But that's still pretty healthy level activity think like at this point.

Roger Read - Natexis Bleichroeder

Okay. The type of projects you're the bids you're currently on, are these late '10 awards or are we thinking more of 2011? The work in '11 and '12?

Quinn Hébert

More 2011 and '12 at this point.

Roger Read - Natexis Bleichroeder

Okay. Alright, that's it from me. Thanks.

Quinn Hébert

Thanks.

Operator

Our next question comes from the line Joe Gibney with Capital One. Please proceed.

Joe Gibney - Capital One Southcoast

Thanks good morning guys.

Quinn Hébert

Good morning.

Joe Gibney - Capital One Southcoast

Just want to talk a little bit about Mexico sort of gone from zero to here in the last couple of weeks with their CapEx pretty same. I curios what you guys are seeing. I think it's still a slower market in terms of pipeline job some opportunities that you guys have characterized at least of the past couple of months. Has that changed at all? Is any of the discussions of letter team exchange at all here in the last couple of weeks with that there are seemingly new found four on the CapEx front.

Bruce Koch

Yeah. I thin for us in 2010 we're not going to be doing any work in some pretty max it really was a market that had very few. It's not out the year looking like it's going to be fairly busy but we just didn't have that many pipeline projects that fit our asset base. It looks like 2011 are going to come with a number of bids that fit right down in our ally, ability to construct offshore.

Joe Gibney - Capital One Southcoast

Okay. And like 12 to 15 projects I think was the number you turned out there previously for --

Quinn Hébert

Yeah.

Joe Gibney - Capital One Southcoast

Obviously next year you're all bidding on behalf of them, is that still out.

Quinn Hébert

Probably about five or six will fit our capabilities.

Joe Gibney - Capital One Southcoast

Okay. That's helpful. And the just shifting toward Gulf of Mexico, I understand that the majority of your backlog now is understandably on the special repair maintenance side. Just curious what your Gulf of Mexico cost reserve saying or talk about or talking at all about construction install, how you're thinking about that a little bit into first half of 2011 with some potential revenue low as you've talked about this shift and the recovery maybe a little bit later into 2011. Will shift some of your largest internationally if you can do so just curious as you plan into more still lot of uncertainty.

Quinn Hébert

Yeah. No I think that the mood is pretty mixed with the customer base. I think everyone looks at the market from their own advantage point. So we're taking a hard look at all of our options in terms of asset repositioning and trying to get the best utilization for our assets. I think it's just too early to really figure out where this is going until the regulatory landscape getting a little bit clearer and that's just going to take time. But right now we’re doing regularly scheduled work that we do year-in, year-out.

Joe Gibney - Capital One Southcoast

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

Quinn Hébert

Thanks.

Operator

(Operator Instructions) Our next question comes from the line Terese Fabian with Sidoti and Company. Please proceed.

Terese Fabian - Sidoti & Co.

Yes, question on your international bidding. Are you seeing -- it seems like your seeing the same amount of bidding values. Are you seeing more competition, more players out there going for the jobs?

Quinn Hébert

We are seeing more competition and a lot more aggressive pricing and so we've -- we been there around a long time. And so we go offshore and we intend to make money. So we're not going to chase that rabbit downward. We're going to hold firm and usually it comes back when the market returns. So that's probably we'll end up doing.

Terese Fabian - Sidoti & Co.

Okay. And then with the Sea Horizon that was on dry dock, when was that finished? Or is it still there?

Scotty Naughton

No, the Sea Horizon is ready to go. Actually what we did was to see as we were completely in our regulatory dry dock requirements, we honestly just had no where to go. We didn't have any awarded work. So we took advantage of that in the second quarter and did a very nice upgrade. We installed a new digital control system to our pipeline intension system. So we got that wrapped up right in the end of June. So we're ready for anything now.

Terese Fabian - Sidoti & Co.

Okay, great. Did you say how many vessels you have stacked in the Gulf area?

Quinn Hébert

Three barges.

Terese Fabian - Sidoti & Co.

Three barges and what do you think is going to be happening with that market. I mean no matter what if drilling is resumed in 2011, is there going to be some contraction, some M&A activity down there? Or with the vessel?

Quinn Hébert

I don’t know -- I think they did some consolidation sort of that the been a couple of deals announced at the high end of the fleet. But I don’t see much contraction in shallow water barge market at this point.

Terese Fabian - Sidoti & Co.

Okay. And then just one last question on interest rates. You said you might be drawing on the revolver later on. Do you have any guidance on rates on interest for the year?

Bruce Koch

I will, I mean our blended rate was about --

Quinn Hébert

It's about mid point two. This is read chip obviously, our borrowing is it's LIBOR based interest rate. So you can forecast, you can see the curve for three month LIBOR and making it own assumptions there. But other that our blended margin on our term loan right now is on 2.5% after this recent amendment. And then after June 30, our revolver margin is 3%. So just take those and add them to where were you think LIBOR is going to do and that's kind of a good forecast.

Terese Fabian - Sidoti & Co.

Sounds good, thank you.

Operator

We have no further questions at this time. I will now like to turn the call back over to Quinn Hébert for any closing remarks.

Quinn Hébert

Okay, well thank you for everyone for joining us this morning. And we look forward to talking to you guy on our third quarter earnings call.

Operator

Thank you for your participation in today's conference. This concludes the presentation. Everyone have a great day.

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