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Cal Dive International, Inc. (NYSE:DVR)

Q2 2014 Earnings Conference Call

August 11, 2014 12:00 PM ET

Executives

Quinn Hébert - Chairman, President and CEO

Lisa Buchanan - EVP, CAO, General Counsel and Secretary

Ike Smith - VP, Finance

John Abadie - EVP and COO

Analysts

Jim Rollyson - Raymond James

Joe Gibney - Capital One

Marty Malloy - Johnson Rice

Operator

Good day, ladies and gentlemen, and welcome to your Second Quarter 2014 Cal Dive International Earnings Conference Call. My name is Stephaney, and I'll be your operator for today. Throughout the conference you will remain on listen-only mode. (Operator instructions)

And now, I’d like to hand the conference over to Mr. Quinn Hébert, Chairman and CEO. Please proceed.

Quinn Hébert

Thank you, Operator. Good morning, everybody welcome to Cal Dive's second quarter 2014 earnings conference call. Hopefully you’ve had a chance to review our press release and slide presentation released earlier this morning. With me this morning is Ike Smith, our VP of Finance; John Abadie, our Chief Operating Officer; and Lisa Buchanan, our General Counsel.

To follow along to today's call, the presentation that we will review this morning can be found on our Web site at www.caldive.com its under the Investor Relations hot button. Turn to Slide 2 for a forward-looking information statement 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, Slide 3 shows our typical presentation outline, let’s jump to Slide 4, second quarter 2014 proved to be a pretty difficult and challenging quarter for us. We generated a loss of $0.31 per share in the second quarter. These results included a $0.06 per share loss related to bad debt reserve we recorded on outstanding receivable from a Mexico contract that commenced bankruptcy proceedings in July this year, a $0.03 per share loss related to early extinguishment of debt and a $0.01 loss per share in small asset impairment.

The results also include a gain on sale assets of $0.05 per share related to the sale of our Gulf of Mexico service fleet that I’ll talk about in more detail later on the call. Although our second quarter revenue was essentially flat compared to last year’s second quarter, our results were significantly impacted for several reasons. First and foremost over the latter half of the second quarter, we are really beginning to mill at the May timeframe we experienced unseasonably adverse weather patterns in the Gulf of Mexico compared to typical second quarter weather affecting both our domestic U.S. operations and Mexico.

In Mexico, two of our four projects were delayed due to these weather interruptions. On one of these projects, the [Terasen Inc.] project, we also experienced cost overruns related to the completion of certain top side, hook up and commissioning scopes of work. This was the first project awarded to us back in March 2013. It took us approximately two additional weeks at the end of May, to complete the work due to the adverse weather we also completed this project in June.

On the other project [Line 7] which was awarded to us in early May 2013, we are about 97% complete and expect to finish the subsea tied work, the hook up work later this month. The remaining two projects are partially complete. Our [Line 49] which was awarded to us in May of 2013 and [Quill] project which was awarded to us in August 2013 have been delayed by Pemex as Pemex waits for these platforms for each of these projects to be installed by other contractors.

Once each of these platforms are installed we’ll complete the remaining scope of work on both projects the remaining scope of the work consist of subsea tied work, top side and hook up and commissioning work. Because the delay is associated with the remaining two projects across the Pemex under the terms of our Pemex contracts, the risk of further weather delays offshore will be borne by Pemex for the remaining scopes of work. We also expect to recover of additional [mob] and [demob] costs and other related costs incurred also these temporary contract suspensions.

Based on the present schedule, we expect to recommence work in the third quarter and complete both remaining projects in the fourth quarter of this year. Overall, we estimate they were about 89% complete with the four Mexico projects on a combined basis and are in pretty good shape to complete the remaining project profitably at the margins we originally anticipated.

In the U.S. Gulf of Mexico, we experienced delay in summer work season and due to a combination of unseasonable weather in the second half of the quarter and customer project start up delays. Two of our large profit generating assets the Uncle John and Rider were delayed beyond the anticipated start dates of projects awarded during the first quarter. Both vessels are now working in these projects and both expected to be highly utilized during the third quarter. Additionally the U.S. Gulf of Mexico in general really just got off to a much slower start than we had assumed which impacted us negatively. Further, the project delays in Mexico that had the knock on affect that these delayed assets from completing both booked and spot market work in the U.S. Gulf market.

Secondly, although we had a strong diving activity in Southeast Asia and Australia for the quarter, we also experienced project driven, project start up delays on two large projects. Toisa Paladin a DSV that we jointly charter with Fugro TS Marine Group didn’t start a project until the mid quarter additionally we had a major project delay in Australia after that vessel experienced a small engine room fire from we were performing saturation diving services, these two assets are now working but those delays outside of our control caused a negative after the second quarter. Third June -- at end of quarter we also recorded a bad debt reserve a $9.5 million related to outstanding receivable owed to us by contract in Mexico that commenced bankruptcy proceedings in July this year.

Looking past these negative Q2 results, we did have a few bright spots for the quarter and at the end of May we completed the sale of our U.S. Gulf of Mexico shallow water diving fleet to a privately held company for cash of 18.5 million and an approximate 20% minority interest in acquiring the assets. These assets sold include eight surface diving vessels and miscellaneous inventory and equipment. We recorded a gain of 8.2 million in the second quarter as a result of this transaction.

We also entered into a multi-year alliance agreement with the buyer under which the buyer provide us with any surface diving services we require in the U.S. Gulf to support our offshore construction and decommissioning operations. This transaction was part of our deliberate strategic plan to divest non-core assets and strengthen the balance sheet.

Also in the second quarter a nice bright spot for us as we started first air diving job in the North Sea, and North Sea expansion is part of our organic growth initiative to provide diving services in certain areas around the world. The client reception to our entry in the North Sea have been very positive although our North Sea operations in 2014 will necessary be significant from a financial standpoint point of view right away we expect the North Sea to be a strong and important market for us in the future. Finally we completed a nice marine construction project in Ecuador that commenced in Q1 we’re also optimistic about additional opportunities in South America for 2015.

Turn to Slide 5, a quick snapshot of our backlog. At the end of the quarter it totaled 234 million compared to 249 million at the end of December 31, 2013 at 400 million for the second quarter last year. The biggest difference between the backlog for the second quarter this year versus last year is the fact that last year’s backlog including a significant amount related to three of the four Pemex project awards I talked about earlier.

About 160 million of this year’s second quarter backlog relates to international projects with 73 million relating to projects in the U.S. Gulf of Mexico. The increase in domestic backlog is evidence of a pretty healthy increase in pipeline and related new construction activity in the U.S. Gulf of Mexico. We believe this increase in pipeline activity is the result increased jackup drilling activity over the past few years in the Gulf of Mexico and its finally turning into work for us.

Now the second quarter backlog 64% is expected to be performed during this year and with the remaining to be performed in 2015 and beyond. As evidence of this improving market in the U.S. both the Rider and the Lone Star booked work in the U.S. into the fourth quarter. I can characterize no outstanding bids during this time of the year significantly higher than the last three years a little bit better than pre-Macondo levels.

In Mexico we are focused on completing the two remaining projects Line 49 and the Quill project as mentioned the work on these projects was temporarily suspended by the client as a result of platform installation delays and other contracts that are outside of our control. Based on the present schedule we expect to recommence these two projects in the third quarter and we expect to complete the work done in this fourth quarter this year.

On the bidding front of Pemex, we’re experiencing a little bit of low for new project tenders, nonetheless we remain confident and expect that activity levels offshore in Mexico going forward which remains a pretty robust market for us.

We currently have two bid outstandings with Pemex, we’re still expecting a tender up to six fairly large marine construction type projects this year for the upcoming expected tenders we expect most of the work to be formed in 2015. In Australia two of our dive supported vessels are booked for contracts that we expect to keep and generally utilize through the remainder of the year and we are contracted continue to provide saturation diving services off with third party vessel in Australia.

In Asia we continue to provide diving personnel and project management under three year contract on two saturation divings in China and the Toisa Paladin also has a fairly busy campaign in Asia. The Sea Horizon has been a little idle in Singapore since it return India in May and our commercial team is bidding activity on several nice opportunities in the region.

On the strategic front in the second quarter our Board authorized the management to export a broad range of alternatives to enhance stockholder value. To this end we have engaged PricewaterhouseCoopers as a financial advisor to assist us with the evaluation and negotiation of potential refinancing operations that are presently underway and evaluation of our capital structure and a possible recapitalization of the company and the evaluation and review of the company’s cost structure. Lazard Freres has also been engaged as a strategic advisor to evaluate a full range of options in order to enhance shareholder value including potential strategic joint venture partnership in respect of the company’s regional operations worldwide, sales specific assets of divisions, merger acquisition or other strategic transactions involved in the company while continuing to execute the business plan that the company has adopted. No options are off the table so we’ll consider the full range of our options.

And I will now turn it over to Ike for a little bit more detailed review our financials on Slide 6.

Ike Smith

Thanks, Quinn. Moving to our summary financial results on Slide 6, our consolidated revenues for the quarter were 122 million essentially flat with the prior’s year second quarter. Domestic revenues were 31 million which was a 28% decline compared to the second quarter last year, whereas international revenues increased 17% to 91 million this quarter compared to last year.

We reported a loss of 29 million for the second quarter or $0.31 loss per share, these results include a $9.5 million pre-tax charge related to a bad debt reserve on unpaid invoices from a contractor in Mexico who filed bankruptcy in July, a $4.7 million pre-tax loss due to the early extinguishment of debt associated with the completion of the second lien financing in May 2014 and $1.9 million pre-tax asset impairment charge.

These pre-tax charges totaled 16.1 million or $0.11 of our quarterly loss. We also recorded $7.3 million pre-tax net gain during quarter which was related to the sale of our U.S. Gulf of Mexico shallow water surface diving fleet and was offset somewhat by small loss related to a barge we scrapped. The aforementioned weather delays on our projects with Pemex as well as lost utilization of our DSVs in the domestic market since these assets remained in Mexico longer than anticipated impacted the second quarter by approximately $0.10. So the domestic market, the slow start to the summer work season both weather delays and customer project start delays impacted the quarter by approximately $0.04.

Moving to Slide 7, our international revenues for the second quarter of ’14 accounted for 75% of the consolidated revenues of the 91 million in international revenues, 42% related to our projects for Pemex, Southeast Asia and Australia each accounted for about 23% of international revenues. We expect international revenues to continue to be greater than 50% of total and due to the strategic focus to diversify however, based on improved domestic activity the rate of sequential percentage increase will moderate and full year international revenue could be less in the total when comparing to 2013 due to differences in the amount of Mexico revenues year-over-year.

On Slide 8, you’ll see a comparison of utilization year-over-year, our U.S. Gulf of Mexico surface diving vessels are included in utilization through the date of sale at the end of May and the first two months of the quarter proved to be very difficult for this surface diving fleet and IRN market. We are moving the surface diving fleet from the calculation utilization of 68% and relates to our small DSVs in Australia. Utilization of our sat vessels was down because we have a 1 stacked 4 point, sat vessel as well as due to the missed opportunities in the U.S. Gulf of Mexico that Quinn mentioned before since these vessels were in Mexico, the increasing utilization of our construction barges benefited from the improving pipeline market.

Turning to Slide 9, you can see our current capital structure with the three layers of debt. As we discussed last quarter, we refinanced a portion of the first lien facility and the $20 million of outstanding unsecured debt in May 2014, with the $100 million second lien facility. We used the net proceeds of that new facility that we pay the entire term loan piece of the first lien debt and we paid approximately 45 million of the first lien revolver. However, the continued working capital pressure we’re experiencing due to the delays in the Pemex projects has required a greater usage of our revolver. This has been compounded by the usual season ramp-up in activity for the summer in the U.S. Gulf of Mexico.

Moving to liquidity, as we have discussed before the Mexico, working capital load and the more recent Mexico project delays have placed tremendous pressure on our balance sheet. As of June 30th, we had 40 million in liquidity and we expect to have comparable liquidity at the end of August. We are continually managing our working capital as we work through these Pemex projects. As at the end of the quarter, we had a 111 million of outstanding AR and unbilled receivables from Pemex. And for these Mexico projects, we are able to invoice Pemex once the project milestones are completed but with the project delays the billing cycle has been pushed to the right.

We are expecting a net cash inflow of approximately $90 million between June 30th and the end of the first quarter of 2015 related to these Pemex contracts alone. This consists of current AR and unbilled as well as the remaining revenue to bill as we complete the remaining projects against the remaining cash disbursement outlay related to these projects of approximately $60 million. Once we are able to invoice Pemex, we have really good visibility into the timing of collection, we’ve collected $15 million so far during the second quarter and we anticipate receiving additional 25 million in the month of August alone for invoices already approved.

To address our financial liquidity profile we plan to amend our existing first lien facility backup to $125 million as you may recall the current facility has step downs of $5 million per month until it reaches $85 million at year-end. We have four proposed commitment letters for this amended financing which will add incremental liquidity with an expected completion by the end of August. We are pleased that the contemplated composition of the new first lien facility will include a number of new strategic capital partners to provide support for growth strategies and our existing vendors are supportive and while we are highly confident this transaction will close by month end, our existing banks have given us until September 30th.

Additionally we will be utilizing the $75 million carve-out for project financing now this will mostly likely benefit future Pemex work but we know this program is available to us and we’re currently evaluating an improved line of credit. The combination of the upside facilities of 125 million and the approved carve-out of 75 million in project financing provides us up to 200 million of first lien financing. We believe these new facilities along with a meaningful expected working capital swing from the Pemex work over the remaining half of year as well as our continued working capital management enables us to execute on our strategic plan.

Going forward our plan is to use the revolver to support and fund operations in areas outside of Mexico such as U.S. Asia, Australia and the UK where the working capital load is lighter and the cash conversion cycles are generally quicker. We plan to use the 75 million of project financing to support other international operations that have a heavier working capital load such as Mexico. We are also evaluating slight non-core asset sales and have engaged PWC for cost transformation and other liquidity enhancing initiatives.

And with that I’ll turn it back over to Quinn.

Quinn Hébert

Okay, good. Look the second quarter is definitely a tough quarter for us and we’re obviously not happy with ourselves. We had a number one off non-recurring items that hit us we believe we’ve reached that Pemex project that had financial deterioration it was a major risk for the remainder of two projects weather shifts to decline all on these last two projects that are to the finish line and we have got to move forward. We have commitments in hand to amend and upsize our revolver to provide us with additional liquidity and that we’re working on project financing to ease the burden on the revolver for future Pemex where it a little bit heavy working capital, at the same time we retained talented and capable advisors to help us take hard biased look at ourselves and evaluate strategic options for the company that has the potential to enhance up shareholders’ value and I want to thank all of our employees who go to work every day for our shareholders and our customers worldwide and finally I want thank our shareholders for supporting Cal Dive.

I’ll turn it over to the operator now for the question-and-answer session of our earnings call.

Question-and-Answer Session

Operator

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

Jim Rollyson - Raymond James

Quinn, it sounds like on the liquidity front, it's more than likely a timing problem just with the pushback of getting work done and therefore, the pushback of when you can submit to get paid by Pemex. Simplistically, is that your view?

Quinn Hébert

Yes, absolutely, I mean clearly timing you can see we’re generating a tremendous amount of cash towards the end of these projects and that’s just the nature of these contracts where you do the work you -- and pay for the work as upfront do the work and then you get paid at the last moment completely.

Jim Rollyson - Raymond James

And given where your balance sheet stands today, does that discourage you from wanting to keep booking work in Mexico, just given the working capital requirements down there or what's your take on that?

Quinn Hébert

I think it’s going to be little more strategic I think we come through with this first poor projects with some less things learn I think we rely more on project financing capital providers to fund the Pemex work is the pretty big group of capital providers in Mexico that do this on a daily regular basis and so we start to take into that group financial providers. And so going forward the thinking is with this private financing to fund the Pemex work going forward and we use amended and upsize revolver to fund the rest of our operations around the world has a much lower working capital in a much cash side.

Jim Rollyson - Raymond James

Okay. That's helpful. What's the bidding outlook today for work either in Mexico or elsewhere?

Quinn Hébert

If you take the second quarter results side things look pretty good, if you look just start Gulf of Mexico we are starting to now see the marine construction work, new pipeline work that’s been generated by the drilling over the last few years and so our backlog in that area is big and it has really been since 2009 and Pemex we still see a significant amount of tenders. We had directly at the beginning of this year to be frank that expected to have bid on more work at this point but there is little bit of the low but you still see Mexico is being a pretty big future work for us it’s in our backyard, we’re extremely busy in Asia, and Australia and the customer reception of North Sea has been very positive and supportive. So I mean all in all, we won’t go to make up the lost weather time in the second quarter but frankly on market fundamentals going forward haven’t changed and things look pretty good.

Jim Rollyson - Raymond James

I take it when you add up all the pieces that happened in the second quarter and with everything sounding like it's getting back to work, with the exception of the two Pemex jobs that don't start up until later in the quarter. I imagine you expect to be in the positive EBITDA camp again in the third quarter. Is that fair?

Quinn Hébert

Yes, absolutely. If you look at our historical run rate the line share of our EBITDAs generated in the third and fourth quarter and we’re frankly after rises all of our major assets have a pretty significant backlog and we’re continue to tend to work, so pretty good about the rest of the year.

Jim Rollyson - Raymond James

That’s helpful. Thanks Quinn.

Quinn Hébert

Sure.

Operator

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

Joe Gibney - Capital One

Thanks, good morning. Quinn, just a question on Gulf of Mexico, the pipelay revenue flow-through, I think it was about $60 million in GOM pipelay work that you guys had secured last quarter. Is it still the expectation, given some of the weather noise and the slower start in the third quarter, is all of that still expected to get work through here in 2014 or do you anticipate some of that pushing out a little bit?

John Abadie

Joe this is John Abadie. We certainly expect to complete the backlog in Q1 and we’ve also since that time added some additional pipelay projects as well as the bid backlog or bid outstanding that Quinn mentioned but certainly the 60 million we indentified last quarter we expect to complete all that this year.

Joe Gibney - Capital One

Okay. How much more sequentially GOM pipelay work did you add into your backlog?

John Abadie

I would say order of magnitude about 10 million.

Joe Gibney - Capital One

$10 million, okay, Ike, just a quick question on how we should be thinking about the back half of this year, G&A and CapEx trends as you guys manage costs, obviously, you've got a lot of collections coming through on the Pemex side, which is going to provide some lift on cash front. But just curious how we should be think about modeling G&A and CapEx for the balance of this year?

Ike Smith

The G&A run rate is going to be at 11.5 million per quarter and from the CapEx standpoint 2014 is actually a pretty light year for us, we are delaying shares through any incurred in cash CapEx we do have some small projects a back office type projects but the lion’s share of the CapEx is already incurred in spend.

Joe Gibney - Capital One

What that total being in the 15 million

Ike Smith

Less than 10 million.

Joe Gibney - Capital One

Less than 10 million, okay, thanks guys.

Ike Smith

Sure.

Operator

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

Marty Malloy - Johnson Rice

Good morning.

Quinn Hébert

Hi, Marty, how you doing?

Marty Malloy - Johnson Rice

Good. Could you give us any more detail in terms of when you expect to receive the payments from Pemex through the end of the first quarter of next year? Are there major milestones that you expect to reach in the fourth quarter here?

John Abadie

Yes, Marty this is John Abadie. It’s really schedule throughout, our contracts have series of milestone events. We certainly seeing as I’ve mentioned 15 million of collections already received so far since June 30th and then approved invoices that we’ll receive till end August about 25 million that relates to milestones that were completed ad early at the end of Q2 and till the first month of Q3. The questions will be affected obviously going forward by the timing at the restart of suspended project, but really it’s kind of schedule throughout the next three quarters.

Marty Malloy - Johnson Rice

Okay. Was the end of 2Q the high point in terms of net debt, do you think?

John Abadie

Yes, I would say it’s a factor.

Marty Malloy - Johnson Rice

Any concern amongst your customers with regards to your liquidity situation?

John Abadie

No not at all I think if you look at where we are in liquidity of 40 million at the end of the quarter and then by August we’ll be about the same shape so I think it just really a timing thing we are talking to all of our clients so we are in pretty good shape.

Marty Malloy - Johnson Rice

Okay, great. Thank you.

Operator

That concludes the question-and-answer session. I will turn the call back over to Mr. Quinn Hébert for closing remarks. Please proceed.

Quinn Hébert

Thank you operator. Thank you to everyone for interest in Cal Dive. We look forward to talking to you again in the third quarter. Thank you very much and nice day.

Operator

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

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