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Cal Dive International, Inc. (NYSE:DVR)

Q1 2014 Earnings Conference Call

May 9, 2014, 04:00 PM ET

Executives

Quinn Hébert - President and Chief Executive Officer

Lisa Buchanan - General Counsel

Brent Smith - Chief Financial Officer

John Abadie - Chief Operating Officer

Analysts

Jim Rollyson - Raymond James

Marty Malloy - Johnson Rice

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Cal Dive International Earnings Conference Call. My name is Philip, I'll be your operator for today. At this time, all participants are in listen-only mode. Later we will be conducting a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I now like to turn the conference over to your host for today, Mr. Quinn Hébert, President and CEO. Please proceed.

Quinn Hébert

Thank you. Good morning, everyone. Welcome to Cal Dive's first quarter 2014 earnings call. We appreciate everyone joining us this afternoon and accommodating us with the rescheduling of the call. We rescheduled because so we could talk about both our first quarter 2014 results and also the debt refinancing transaction that we also announced today. With me today is Brent Smith, our Chief Financial Officer; Lisa Buchanan, our General Counsel; and John Abadie, our Chief Operating Officer.

To follow along today's call, the presentation can be found on our website at www.caldive.com under the Investor Relations hot button. On Slide 2, we have an important message from our General Counsel.

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 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 Hébert

Okay. On Slide 3 is our standard presentation outline. I'll jump right into Slide 4, our remarks. For the first quarter 2014, we had a solid quarter with the first positive EBITDA for our first quarter since fiscal year 2009. The significant improvement in our financial results come from our international operations. We had significant contributions from increased activity levels in Mexico, where we're working for Pemex on four fairly large projects.

While we did experience harsh weather in the first quarter, especially in the month of March than we anticipated, we did make significant progress towards completing the Pemex projects. We expect to complete two of the four Pemex projects during the second quarter and the remaining two projects will be completed during the third and fourth quarters.

In other international areas, we also had full utilization of the Sea Horizon, our combination derrick/pipelay barge project offshore India. We also executed a nice platform installation project offshore Ecuador in the first quarter utilizing a derrick barge Pacific, which was recently completed. In Australia, two of our three DSVs, our diving support vessels are booked on contracts. Also in the first quarter, we sold a second portable saturation diving system to a client in China. We're currently providing diving personnel and management for the two saturation diving systems that are operating in China.

In the North Sea, we're pretty excited, we won our first air diving project, which should commence in June of 2014. We intend to grow this business in the North Sea organically and the current response thus far has been fairly positive.

Domestically, the US Gulf of Mexico was about in line with our expectations, although we did experience some harsher weather in the month of March, which is normal for the year. For the first quarter in the US Gulf of Mexico, certain of our US assets were busier than we expected, while others were below expectations either due to the first quarter weather we talked about or the clients had not yet decided to pull the trigger on their 2014 spending plans.

Although the Uncle John utilization in the first quarter, which is our multi-service semi-submersible, hovered in the 50% level of utilization, she is booked for the majority of the remainder of the year.

We've also noticed a nice improvement in the pipelay new construction market in the US Gulf of Mexico as tendering levels in this market have increased and we've been awarded over $60 million in new construction related projects during the first quarter for installation offshore in the US Gulf of Mexico in fiscal 2014. We hadn't really experienced this level of new construction activity since the pre-Macondo well blowout years before fiscal 2010. The US Gulf of Mexico surface diving work remained competitive in the first quarter.

If you turn to Slide 5, our backlog slide, our backlog in the first quarter of 2014 totaled about $282 million compared to approximately $249 million of work as of December 31, 2013, and $221 million of work at March 31, 2013. This backlog level represents 28% year-over-year improvement and this also represents our highest first quarter backlog since the first quarter of 2009. In our present backlog, about $179 million relates to international projects with the remainder relating to projects in the US Gulf of Mexico. Of the backlog at the end of the first quarter, 89% is going to be completed in fiscal 2014 and the remaining will be performed in 2015 and beyond.

Looking forward, Mexico remains a very important market for us. In addition to the work I mentioned earlier that we're currently completing, we expect to submit three to five bids to Pemex over the next few months. The type of Pemex projects we expect to tender are in the $75 million to $125 million range per project. These are typical offshore pipelay, subsea tie-ins and (inaudible) work.

Our US backlog is currently about $103 million of work. Out of this, just over $60 million is new construction backlog, demonstrates an objective measure of the improvement in the US new construction market. This represents good work for our shallow water pipelay barges and our DSVs, diving support vessels to perform the tie-ins. To be clear, I'm not trying to forecast any type of major ramp-up in the US, just that our clients are busier this year when compared to the last couple of years.

In Australia and Asia, we feel good about our prospects in these areas. We expect to keep three DSVs busy in Australia for the rest of the year. We have sold tendering levels for additional work for the Sea Horizon in Asia region. And overall, the fundamentals of this market appear pretty good.

For the North Sea, we're really just starting to scratch the surface in this area. We're really excited about our opportunities in this area. The client response has been solid. A big challenge in this area is to really grow organically to have sufficient scope and scale to be in a position to take full advantage of the opportunities in this area.

On the balance sheet front, we've also announced today refinancing our debt structure after the quarter and to provide some more flexibility and liquidity with respect to ongoing and future offshore construction work, especially in Mexico. Brent Smith, our CFO, will walk you through the details of our new debt structure. But as far this refinancing, I want to highlight the company is now permitted to obtain up to $75 million in local project financing for international projects. This will allow the transition from using our revolver for working capital needs for the large projects to utilizing local project financing which will enhance our overall liquidity.

In summary, the first quarter was a good start to fiscal 2014, as we generated positive EBITDA and we refinanced our debt to provide us some more flexibility and liquidity for the company to continually to execute our international expansion strategy. The new debt structure will allow us take on more large international construction projects and we intend to take full advantage of the opportunities in these markets.

I want to thank our shareholders for their support of Cal Dive, and I'll turn it over to Brent starting on Slide 6 to go over the financial results in a little more detail. Brent?

Brent Smith

Thanks, Quinn, and good afternoon, everyone. Moving to this next slide, it shows our financial results for the first quarter 2014 versus the same period 2013. Primarily driven by activity ramp-up in Mexico, our first quarter revenues increased nearly 50% and our first quarter EBITDA increased from negative $6.5 million to positive $2 million. The increase in Mexico was partially offset by lower activity domestically, in part due to redeployment of certain assets to Mexico.

Slide 7 shows our utilization for the first quarter this year versus the first quarter 2013. The increase in our saturation diving vessels was due to Mexico activity, partially offset by lower utilization for the Uncle John, although as Quinn mentioned, she is now booked for the remainder of the year.

The construction barge utilization increase is also due to the increase in Mexico activity, as well as the increased utilization for the Sea Horizon and the increased utilization for the Pacific working in Ecuador. The surface fleet utilization is up modestly due to the combined activity of our surface boats we have in Australia.

Moving to Slide 8, our revenue mix for the first quarter was $105 million international and $14 million domestic with Pemex accounting for 60% of the international total. Our first quarter international revenues increased by nearly 80% compared to the first quarter 2013, again driven by our activity in Mexico as well as increased utilization for the Sea Horizon in Southeast Asia. The international revenue accounted for 88% of our total consolidated revenues compared to 73% for the first quarter of last year.

Slide 9 shows our debt structure and liquidity. The first chart is our net debt levels and the recent increase due to our working capital needs in Mexico. To illustrate this, you can see on our balance sheet our net debt position increased by $37 million from year-end. Our simple working capital comprised of accounts receivable and accounts payable also increased by $37 million. This increase for working capital is temporary as we will collect revenue from Pemex over the next five months as these projects are completed.

The next slide captures the key highlights of our refinancing that we announced earlier today. We entered into $100 million second lien secured loan consisting of a new $80 million term loan and the conversion of our existing $20 million unsecured loan into a secured term loan. We will use these net proceeds to repay our existing $29.7 million bank term loan and $45 million of our outstanding revolver borrowings. The $20 million loan bears interest at LIBOR plus 6.75% and the remaining $80 million loan bears interest at LIBOR plus 11.75%. Neither loan will have any scheduled amortization over their five-year maturity.

As part of our refinancing efforts, we also amended our credit facility to allow up to $75 million in local project financing, which as Quinn mentioned, we intend to use to help finance the working capital needs in Mexico as well as other potential large international construction projects, with the intent on replacing the heavy use of our revolver going forward for such working capital needs.

Finally, the pie charts at the bottom show our financing capacity as of March 31 and how it looks on a pro forma basis after the refinancing. The key here is that we have enhanced our liquidity and our flexibility. As for the existing Pemex contracts, we continue to make good progress completing these and have had no collection issues with Pemex. For the existing contracts, we've only collected approximately 44% of the total contract value, but that lag again is just due to the billing milestone schedule, which is why these contracts are very working capital intensive.

With the previously announced delay of one of the projects in particular into the summer, based on our current work schedule, we will continue to collect the remaining revenue from Pemex as we complete certain milestones across the projects. The collections will primarily be spread out over the next five months.

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

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

Jim Rollyson - Raymond James

Quinn, you mentioned several bids in the $75 million to $100 million range down in Mexico. Can you give us some sense of how many there are or just maybe a better way is how much in total backlog opportunity that you're tracking for down there this year and maybe contrast that to where you guys were at this time of last year?

John Abadie

The total activity we expect to see this year is about six to eight bids. We have a couple of outstanding at this point. And we expect total market activity of projects awarded to be somewhere in the $800 million range, which is in the ballpark of what was awarded last year in total in the market.

Jim Rollyson - Raymond James

So that's another solid year and hopefully good luck on picking some of that up. And, Quinn, you sound a little more optimistic about the Gulf this year than you have at least in recent past, and curious what's driving that. And maybe more importantly, with the couple of recent asset turnovers going on in the Gulf, do you think that that builds to an even better potential once that stuff kind of gets unlocked?

Quinn Hébert

Yeah, I think it's driven by two things. One is we typically go to work after the drilling has been done. That's around a three year lag time we kind of see a little bit of that prospectivity coming in. And so we had a big delay after Macondo and then really was until 2012 or so when the shallow water guys get really busy. And so in open water drilling in that class, obviously tracing liquids, there are a lot of property transactions. So the clients in the last couple of years, they'd been getting their hands around that rather than just going off and drilling. And so that's been delaying a lot of bids. So we've seen that come to fruition.

One of the nice jobs we want is associated with rigging some of these deepwater fields online and tie-in at deepwater fields of an existing infrastructure. So it's a couple of things factors into market that create a little bit more dynamic, we see more pipelay bids and our backlog is at $103 million for US, which is really haven't seen for, frankly, Jim, quite some time.

I just don't want to paint a picture and get ahead of ourselves. We're not trying to be overly optimistic, but just to clear objective data, this year is turning out to be better than last year.

Jim Rollyson - Raymond James

Sounds great. And the last one, Quinn, with the new North Sea location, sounds like you got a little bit of work. How do you think about the timeframe before that starts to pick up and become a more meaningful contributor? Are you generally doing diving or you have construction opportunity there too?

Quinn Hébert

I think we're generally going to start small air diving. So it won't really be a needle mover for us for the first year, but really to prove ourselves and again clients confidence and move forward in that market will be primarily just a diving operation and in support of directly working for the clients or its support of other contractors.

Operator

(Operator Instructions) And your n ext question comes from the line of Marty Malloy from Johnson Rice.

Marty Malloy - Johnson Rice

On the Pemex, the receivables you have from Pemex, do they include any claims for the delays caused by Pemex in completing the projects?

Brent Smith

There are some charges due to delays, yes. We are able to recover some delay cost as part of the contract, yes.

Marty Malloy - Johnson Rice

And then with the new debt that you put in place, assuming that the debt levels remain at the same level, what would be the increase in incremental interest expense on a quarterly basis?

Brent Smith

Well, a lot of it ultimately will depend on how much project financing we're going to do, which we're still evaluating that. But basically, you're looking at probably on average on the debt level, depending on our revolver activity, it might be about $1.5 million to $2 million more a quarter.

Marty Malloy - Johnson Rice

And when you look at this Pemex bidding opportunities that you have out there and other opportunities in the Gulf of Mexico, what is your capacity to issue LCs when and if you get these projects?

Quinn Hébert

(inaudible) LCs, that's very, very rare. We have like one small LC outstanding for a couple of hundred thousand not relating to the construction project. So typically, we've not had LCs. For Pemex, we did not have to post LCs. But our ability would be through our revolver, but again that has not been an issue whatsoever. I can't remember the last time we had a significant LC out there.

Operator

Currently at this time, we have no further questions in the queue.

Quinn Hébert

Okay. Well, thank you, everyone, for joining us on our call. Again, we appreciate everyone coming, having the rescheduling, but it was important for us to talk about both, results and the debt refinancing at the same time. I want to thank all of our employees offshore and onshore, working hard for the company and being safe out there for our clients and also our shareholders. Have a nice weekend. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you all for your participation and you may all now disconnect. Have a wonderful day.

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