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Cal Dive International, Inc. (NYSE:DVR)

Q3 2010 Earnings Conference Call

October 29, 2010 10 AM ET

Executives

Quinn Hebert – President and CEO

Lisa Buchanan – EVP, General Counsel, Secretary

Brent Smith – CFO, EVP, VP - Finance, Treasurer

Scott Naughton – EVP and COO

Analysts

Jim Rollyson – Raymond James

Roger Reed – Natixis

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2010 Cal Dive International earnings conference call. My name is Ann and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. (Operator Instructions) I would now like to turn the presentation over to Mr. Quinn Hebert, President and Chief Executive Officer. Please proceed sir.

Quinn Hebert

Thank you. Good morning everyone and welcome to Cal Dive’s third quarter 2010 earnings call. With me this morning is Scotty Naughton, our Chief Operating Officer, Lisa Buchanan, our General Council and Brent Smith, our Chief Financial Officer.

To follow along with us this morning you can obtain our presentation at our website which is located at www.caldive.com under the investor relations hot button. If you turn to slide two, Lisa has a message for us.

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 factors that could cause our actual results to differ, we refer to the risk factors described in our Form 10-K on file with the Securities and Exchange Commission.

This call also includes certain non-GAAP financial measures. For a reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures, we refer you to our earnings press release and the presentation slides for this call.

Quinn Hebert

Okay. On slide three is our normal agenda. I’ll review the quarter, then Brent will get into the details on our financial results, and then we’ll have Q&A.

Turning to slide four, today we’re reporting third quarter 2010 net income of $19.1 million or $0.21 per share, which excludes a $302.5 million non-cash impairment charge that’s related to goodwill for idle construction barges. Brent will explain those impairment charges in greater detail later in the call.

For the third quarter we also generated $50 million in EBITDA. With the relatively slow start to the year, we kicked into high gear in this quarter with overall fleet effective utilization at about 69%. Our financial results for the quarter did not reach last year’s third quarter levels for the following reasons.

We had, last year we had three large new construction projects in China and Mexico and the northeast U.S. that went well, were completed and did not recur this year. This year we also had reduced day rates in the Gulf of Mexico as we’re coming out of two soft quarters at the beginning of this year. We also had one DP DSV in the Gulf that was down due to mechanical downtime and then overseas, we had reduced activity levels due to market conditions.

These items were partially offset by the increased offshore activity levels from the BP well blow out in the Gulf of Mexico where we had three barges and two utility vessels plus a significant number of third party assets on day rate charter. All of these assets were focused on spill response efforts.

Sequentially though, our third quarter 2010 was much better than the second quarter of 2010 as the expected seasonality led to much better financial results for the third quarter, and this happens typically year in and year out.

Overall, from an operational point of view, in the third quarter this year, our women and men executed our projects very safely and very well offshore, and we’re pleased with these results in what’s a tough operating environment.

With the drilling moratorium in place for the entire quarter, which negatively impacted deep water and shallow water permits across the board, we did have less new construction activity in the Gulf of Mexico as you would expect, and this is reflected in our lower construction barge utilization rates across the board, but, we did have strong levels of RM work and salvage work.

Internationally, we faced different headwinds with increased competition and clients insisting on tougher terms and conditions which negatively impacted activity levels. Two DSC’s that are overseas did work during the quarter in China, the Black Sea in Oman, but we did not win a project for the Sea Horizon, which is our large combination direct lay barge.

The revenue split for the third quarter between international and the U.S. business was 84% in the U.S. and 16% overseas revenues.

Turning to slide five, we’ll talk a little bit about our backlog. We have a $233 million backlog at the end of the third quarter which we feel is a healthy number, given that we burned off some of the second quarter backlog in the third quarter 2010.

If you compare the third quarter backlog to 2009, with this year’s third quarter backlog, the 2010 backlog amounted to about 10% ahead of the 2009 number at the same time last year. In our present backlog, about 43% of the backlog involves U.S. based projects and about 57% are overseas projects.

Additionally, about 48% of our backlog is to be performed for the remainder of this year and then the rest of the backlog is for 2011 and beyond.

We have about $1.2 billion in total bids outstanding at this point. Over the last year or so, total bids outstanding has been in the $1.2 billion to $1.9 billion range, so we’re where we think we need to be at this point.

Talking a little bit about the Gulf of Mexico, September 15 of this year, the Bureau of Energy Management and Regulations issued a notice to leaseholders providing decommissioning guidance to the Gulf of Mexico operators for wells and platforms in the Gulf. This is the so-called idle arm initiative.

This MTL attempts to close certain loopholes that exist in the present system and define more specifically what has to be salvaged and when it has to be salvaged. Our clients have until about mid February next year to submit a comprehensive plan to address the wells and platforms that fit within these definitions.

We believe it’s a little too early to attempt to quantify the full impact of this DTL until the plans have been submitted and the regulators have reacted to those plans and the operators have a final path forward.

We look forward a little bit in our marketplace, consistent with the seasonality of our Gulf of Mexico business, the fourth quarter activity levels are always very difficult to predict because we don’t know when the winter weather sets in in the Gulf of Mexico or when our customers will start to curtail spending in their capital budgets and other variables.

We are however, expecting the financial performance for the fourth quarter of 2010 to be less than the financial performance in the fourth quarter 2009. We’ll just have to wait and see how the quarter unfolds.

Although there’s some mixed evidence that the worldwide economy is improving, we’re still expecting a challenging remainder 2010 and at least for the first half of 2011. Domestically, the enhanced safety regulations and the (inaudible) for permitting and drilling, notwithstanding the fact that the deep water drilling moratorium was lifted on October 12 this year, there continues to be a significant amount of uncertainty surrounding the requirements and the pace for the issuance of shallow water and deep water permits in the Gulf of Mexico.

Internationally, we still see increased level of competition and more owners contractual conditions that will take a lot of work itself due to the market, and this type of environment overall, our clients historically have been very cautious in capital spending.

We’ve been through this type of dynamic market, fluid market before. We have a lot of talent at all levels of this organization. We’re very focused on delivering the best services for our clients and working as hard as we can for our owners.

I’ll now turn it over to Brent on slide six to review the third quarter 2010 financial results in more detail.

Brent Smith

Thanks Quinn. Slide six is the most recent financial results for 2010 versus 2009. We generated revenues of $193.8 million in the third quarter of 2010. This is down approximately 10% compared to the third quarter of 2009. We also generated EBITDA of $50.3 million this quarter compared to EBITDA of $73.8 million during the prior year quarter.

Including the goodwill and after the impairment charges, we recorded a net loss of $283.4 million. These impairment charges included all of our goodwill or $292.5 million and asset impairment of $23.2 million related to four idle construction projects.

We normally perform our annual impairment test later in the year, but our declining market cap relative to the book value of our equity, coupled with the uncertain market conditions prompted us to perform the analysis during the third quarter. As a reminder, these impairment charges have no impact on our debt covenants or our liquidity.

Excluding the impairment charges, we had net income of $19.1 million or $0.21 per share during the quarter compared to net income of $32.9 million or $0.35 per share in the prior year quarter. Aside from the impairment charges, the decrease in profitability is primarily due to fewer large construction projects in the third quarter of 2010.

Specifically, there were three construction projects in the third quarter of 2009 that did not reoccur in 2010 as Quinn discussed earlier. These included the L&G project located offshore Boston, and pipe lay projects in China and Mexico.

In addition, day rates for our diving fleet were lower compared to 2009. This was partially offset by slightly higher utilization in the third quarter of this year.

Moving on to slide seven, we show our utilization. As a reminder, we show both effective and calendar day utilization. The total fleet effective utilization for the third quarter of this year was 69%, which again was up slightly from the prior year quarter utilization of 65%.

Our salvage vessels increased from 84% in the third quarter of 2009 to 88% in the third quarter of 2010, while the construction barges decreased from 54% to 46% year over year. Even though utilization for the diving assets increased, again this was more than offset by the reduction in the day rates I mentioned earlier.

Slide eight shows our revenue mix between domestic and international. As you can see, international revenues decreased from 2009. The decline is due to lower effective utilization for our three vessels located overseas. It was 66% this quarter versus 75% in the prior year quarter, primarily due to the fact that the Sea Horizon did not work in the third quarter of this year.

Slide nine shows our net debt levels as well as our net debt to book cap at September 30. We had net debt of $172 million, which was comprised of total debt of $185 million, less cash of $13 million. Our total debt was comprised of a term loan of $180 million, and revolver balance of $5 million, which was down from $20 million at June 30.

Our net debt to book cap ratio was 31%. Even though net debt levels declined from June, the ratio increased as a result of the reduction in equity relating to the impairment charges I discussed earlier.

Moving on to slide ten, slide ten shows our liquidity position at September 30. We generated free cash flow of approximately $25 million during the third quarter of this year, which we used to repay debt. At September 30, we had total liquidity of $242 million, which was comprised of $229 million of availability under our $300 million revolver as well as $13 million of cash on hand.

As a reminder, we amended our credit facility in July to increase our permitted debt to EBITDA ratio, as our revolver borrowing capacity is effectively limited by that covenant. Although we are not forecasting a breach of the covenant, we wanted to increase liquidity to access under the revolver.

As for cash requirements in the fourth quarter, we still expect to incur around $65 to $70 million in total 2010 CapEx and dry dock expenditures, and through September we have incurred approximately $41 million. In addition, we have our remaining fourth quarter term loan payment of $14.8 million.

And finally, we’ve included our non-GAAP reconciliations on the final slide for your information. And with that, I will turn it back over to Quinn.

Quinn Hebert

Okay, operator, we’ll open up the phone lines for the Q&A please.

Question-and-Answer Session

Operator

Okay, thank you. The Q&A session is now open, and our first question comes from the line of Jim Rollyson with Raymond James. Please proceed.

Jim Rollyson – Raymond James

Good morning guys.

Quinn Hebert

Hey, morning Jim. How you doing?

Jim Rollyson – Raymond James

Good. Quinn, permitting, the last time you guys talked, obviously the whole moratorium thing has not been very good for permitting, especially for the drilling side, but it was also kind of holding you guys up on the construction side. Has that started to improve in the last few months?

Quinn Hebert

It’s started to improve, better since the moratorium’s been lifted, but it’s not nearly what I would consider sort of a normal permitting process. So there’s still some slowness.

Jim Rollyson – Raymond James

Got you. At least small steps, huh?

Quinn Hebert

Small steps.

Jim Rollyson – Raymond James

On the bidding side, you mentioned $1.2 billion of project bids. Can you kind of talk about I guess a little more color to that? What do you see for trying to win some of those projects, and I know this is your best estimate, but start actually getting awarded – seen your neighbor down the street pick up a little bit of work, so at least there’s some stuff going on out there. Where is the opportunity? What do you see in Mexico? Just kind of a little color around the bidding outlook.

Quinn Hebert

Sure. I guess in Mexico first, that’s probably five or seven jobs we’ll be bidding between now and the first quarter, or second quarter of next year, so hopefully we’ll have something the next time we talk to you guys.

On the projects here typically for the salvage, we’ll start bidding that stuff in the Gulf of Mexico in December to March, and that’s when we start to fill up the backlog there. On the new construction stuff overseas, we’re bidding that right now so we’ll see where we are.

I think on the call, we alluded that the competition is pretty tight overseas and so those margins are compressed, but we’re still in the hunt for sure.

Jim Rollyson – Raymond James

And historically fourth quarter is usually, seasonally comes off and depends on what kind of level of activity is out there. In the past you’ve had some hurricane benefits that have helped 4Q and then in normal markets it’s down. You’re about a month into the quarter. What’s the call right now looking like for 4Q. Do you think you guys are profitable in 4Q or is it still a little bit early to say?

Quinn Hebert

I think it’s too early right now. I mean the momentum of the third quarter carried into the first two or three weeks of October, but we know that the winter weather will start to set in and our clients will start to curtail their spending. And so we’re beating the bushes pretty hard to make sure we keep the fleet as busy as we possibly can, and we’ll see how the quarter unfolds.

Jim Rollyson – Raymond James

Okay. Brent, any kind of preliminary thoughts on CapEx for next year?

Brent Smith

We’re still going through our budget process right now, so I wouldn’t want to throw out a number. We do have a fairly heavy required dry dock schedule next year. Scotty, do you want to talk a little bit about the dry dock schedule?

Scott Naughton

Yes, we have 13 dry docks required for next year, although the biggest two, the Uncle John and the Atlantic will be late in 2011.

Brent Smith

So I think obviously, we’re going to take care of the required items, but we’re certainly going to limit the discretionary CapEx as much as we possibly can as part of our budget process, and I’m sure the next time we have a call, we’ll have a lot more color around that.

Jim Rollyson – Raymond James

Perfect. Thanks for the thoughts guys.

Quinn Hebert

All right.

Operator

Our next question comes from the line of Roger Reid with Natixis. Please proceed.

Roger Reed – Natixis

Yeah, good morning.

Quinn Hebert

Good morning Roger.

Roger Reed – Natixis

I guess kind of taking some of the comments in the press release and then along the lines of the thought process on the dry docks, if business stays weak and look, we’re betting on Mexico awarding stuff which certainly takes longer than anyone ever thinks, as you hit these dry docks next year, is it a possibility that in order to conserve cash, save on costs that some of these vessels would just simply get put on the beach for a time?

Scott Naughton

Yeah Roger, Scotty Naughton here. That’s actually standard operating procedure with at least a couple of the planned dry docks for next year. If we’re not comfortable that we’ve got a decent backlog, we’ll conserve our cash and wait for better days.

Brent Smith

Right, and certainly we’re going to evaluate each dry dock on its own, looking at obviously the cost of dry dock versus what kind of cash flow we can generate from that asset during the year, so we’re definitely going to look at that very closely.

Roger Reed – Natixis

Okay. And then what CapEx other than dry docks would you be looking at next year, if not a dollar number, I mean sort of what kind of projects are you considering.

Brent Smith

First of all, we don’t think that number is going to be very large outside the dry docks. I think it would be some stuff relating to facilities. You always have a little bit of IT, just some typical non-dry dock Cap Ex. But obviously we’re going to be focusing on limiting that as much as possible.

Roger Reed – Natixis

Okay. And then back to the comment on the international markets, talked about them being competitive, but if you were comparing bidding and quoting activity say year to date, how does late October, almost early November compare to what we’ve seen three months ago, six months ago, nine months ago?

Quinn Hebert

Well I certainly cannot say we’ve seen any significant improvements in the market. It’s kind of flat line. We’re just beating the bushes trying to get activity going where we can.

Roger Reed – Natixis

So any bright spots anywhere?

Quinn Hebert

Well definitely Australia. We have a nice backlog of Australia work next year. We’re involved in some of the Chevron Oregon activity and we have ongoing work with Esso in three different geographic areas in Australia. So that’s certainly our bright spot right now.

Roger Reed – Natixis

Okay. Thank you.

Quinn Hebert

Sure.

Operator

And there being no further questions, I’d like to turn the call back over to Mr. Quinn Hebert for closing remarks.

Quinn Hebert

Okay. Thank you. Thank you everyone for participating on our call, and we look forward to talking to at the next quarterly release. Have a good day.

Operator

Ladies and gentlemen we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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