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Oceaneering International, Inc. (OII)

Q2 2007 Earnings Call

August 2, 2007, 11:00 AM ET

Executives

Jack Jurkoshek - Director, IR

T. Jay Collins - President and CEO

Marvin J. Migura - Sr. VP and CFO

Analysts

Stacy Nieuwoudt - Pickering Energy Partners, Inc.

Neal Dingmann - Dahlman Rose & Co.

Stephen Gengaro - Jefferies and Company

Scott Gill - Simmons and Company

Thomas Escott - Pritchard Capital Partners

Waqar Syed - Petrie Parkman

Victor Marchon - RBC Capital Markets

Presentation

Operator

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oceaneeering Second Quarter Earnings Release Conference Call. All lines have been place on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions].

In consideration of other participants, please limit your questions to two to three questions per queue. You may queue in again for additional question. Thank you. Mr. Jurkoshek, you may begin your conference.

Jack Jurkoshek - Director, Investor Relations

Good morning everybody. This is Jack, and I'd like to thank you for joining us this morning. And I'd like to particularly welcome those of you who may be participating in the webcast of this event, which is being made available through the company boardroom services conference CCBN.

Joining me this morning are Jay Collins, our President and Chief Executive Officer, who will be leading the call; Marvin Migura, our Chief Financial Officer; and Bob Mingoia, our Treasurer.

Just as a reminder before we start, remarks we make during the course of this call regarding our earnings guidance, business strategy, plans for future operations, and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

And I am now going to turn the call over to Jay.

T. Jay Collins - President and Chief Executive Officer

Thank you, Jack. Good morning, and thanks for joining the call. It's a pleasure to be here with you today. During the second quarter of 2007, we achieved record quarterly earnings, almost 25% higher than our previous best reported for the third quarter of 2006. This is evidenced not only of the high demand we are experiencing for our Subsea services and products but also our strong operational performance.

Net income of $47.9 million was more than 55% above the second quarter of 2006 and nearly 45% above last quarter. Our record quarterly earnings were substantially above our guidance range and the street consensus estimates. Both the year-over-year and sequential quarterly net income improvements were broad based.

All six of our business segments contributed to the increases. As stated in the press release, our above guidance performance was led by our ROV Subsea projects and inspection businesses with each realizing record operating income results.

Given our second quarter performance, and our improved annual operating income outlook for Subsea projects and inspection, we're raising our 2007 EPS guidance to a range of $2.95 to $3.10, a growth rate of more than 30% over our 2006 record results.

The low end of our current range is higher than the high end of our previous range which was $2.70 to $2.90. This is based upon expectations that during the second half of this year we will achieve continued earnings growth for ROVs and Subsea products and comparable results from Subsea projects. This annual guidance range increase is attributable to our business focus on deepwater and Subsea completion activity and our participation in hurricane damage related platform decommissioning projects.

For the quarter our ROV business was even better than we had anticipated as we achieved higher average pricing and more days on higher than forecasted. Year-over-year and sequentially, operating income increased by over 30%. The year-over-year and sequential growth was accomplished by improving our average operating income per day on hire by approximately 20% through increases in pricing and utilization.

During the second quarter, we attained record average pricing of $8,300 per day and a record number of days on hire of nearly 15,700. As we had expected operating income margin during the quarter sequentially increased, it was 28% during the second quarter up 4 percentage points from the first quarter and the same is in the second quarter of 2006. Year-to-date operating income margin has been 26%, the same as in the first half of 2006. Consequently, we still anticipate our annual 2007 ROV operating income margin will be comparable to last year.

During quarter we added 13 systems to our fleet and disposed four for a net growth of nine vehicles. At the end of June we had 202 systems available for operation, up 20 from June a year ago. Our fleet mix during June was 67% in drill support and 33% in construction and field maintenance. This is a snapshot position and should not be interpreted to indicate any permanent fleet mix. This compares to a 72/28 mix in March of this year and a 71/29 mix in June 2006.

The change to more construction-related service reflects the fact that of the 13 new vehicles added to our fleet during the quarter, 7 went into this type of service. In fact, of the 20 new vehicles we added to our fleet this year 10 have initially gone into construction service.

I would like to remind everyone that we've been pursuing construction and field maintenance work for the last several years. And by our count, we are now the largest provider of this type of ROV service in the industry. Consequently our growth prospects are not solely tired to the reactivation or upgrades to existing floating rigs or announce new floating rig construction.

Our Subsea product segment achieved record operating income result as OIE, our specialty products group, performed at an all-time high level. The sequential increase in operating income was attributable to outstanding performance by OIE, particularly sales of ROV tooling, field development hardware and pipeline connectors and repair systems. As expected, operating income margin for this segment sequentially declined due to our inability to sustain the exceptional favorable product mix we achieved in the first quarter of this year.

We continue to believe our margin on Subsea product sales for the year 2007 will be higher than 2006 in the 17% to 18% range. Year-over-year both OIE and Multiflex umbilical operations contributed to the nearly 45% increase in revenues and the doubling of operating income. OIE's profit improvement was broad-based as it was due to increased contribution from most of our specialty product offerings. The Multiflex profit increase was largely the result of improved performance at our Panama City, Florida plant.

At the end of the quarter our products backlog was $378 million up a $133 million or more than 50% above June a year ago and slightly more than last quarter. Bid activity remains at a very high level and we expect our products backlog to continue to grow during the last half of this year.

As expected, and discussed, at our last earnings conference call our Subsea projects business substantially improved during the quarter due to an increase in hurricane damage related project activity and demand growth for our deepwater Subsea equipment installation and inspection, repair and maintenance services. In fact this segment performed much better than we had forecast, and realized record quarterly operating income which was attributable to excellent operational performance and higher than projected utilization of our assets.

Subsea projects' quarterly operating income increased 33% sequentially and 13% year-over-year. Year-to-date we've earned 15% more operating income than in the first half of 2006, and we expect the second half of this year to be comparable to the first half.

Our Inspection segment had its best quarterly performance and achieved better than expected results. Sequentially Inspection's quarterly operating income more than doubled as a result of normal seasonality and strong overall demand growth in most of the geographical markets we serve. We continue to benefit from our ongoing efforts to improve pricing and sell more value-added services. Year-over-year, Inspection operating income improved by over 55% on an increase of revenue of 30%. Again this growth was widespread as it came from most of the geographical areas in which we operate and is evidence of market demand growth and our successes in securing new contract, selling more value added services, and increasing pricing.

Our MOPS segment operating income increased those sequentially and year-over-year due to a settlement we negotiated on the previously announced contract termination for use of our production barge San Jacinto. This settlement was in lieu of the barge being restored to the condition specified in the contract. We currently... we're currently investigating our options with respect to this asset and we will keep everyone posted once the decision is made; most likely it will be so.

As expected the earnings contribution from our Medusa Spar investment, reported as equity income from unconsolidated affiliates, declined sequentially in year-over-year due to lower production throughput at the Spar.

Our ADTECH non-oilfield business had a very good quarter. The sequential and year-over-year improvement in operating income was attributable to increased work for the US Navy on submarines and general engineering services.

I am now going to turn the call over to Marvin to discuss our cash flow, capital expenditures, and balance sheet.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Thank you, Jay. Good morning everybody. Regarding cash flow: if you add depreciation back to our operating income, we generated almost $100 million of cash flow in the second quarter, nearly 50% more than the second quarter of 2006 and 30% above the last quarter. For the first half of 2007, operating income plus depreciation was approximately $175 million up 40% from the first half of 2006.

Capital expenditures during the quarter totaled $61 million. These investments were predominantly for upgrading and expanding our ROV fleet and facility expansions in the UK, Norway, Houston, and Morgan City. Approximately 75% of our investments both during the quarter and year-to-date have been in our ROV and Subsea products operations.

We now anticipate investing approximately $200 million this year. This will mainly be for ROV fleet expansion and upgrades, facility expansions, acquisitions, including our recently announced purchase of Ifokus, maintenance CapEx projects and vessel upgrades. We are continuing to look for additional accretive acquisitions and organic growth opportunities with better than cost of capital returns, and we intend to use our strong cash flows and balance sheet to further grow our earnings.

Because we've been able to find ways to put our cash flow to work, namely in capital expenditures and Subsea products, raw material inventory, our debt increased $8 million during the quarter. At the end of June, we had debt of $245 million and equity of $793 million. Our debt-to-cap percentage was 24%. Thank you.

Jay, now I will turn the call back over to you.

T. Jay Collins - President and Chief Executive Officer

Thank you, Marvin. In summary, our second quarter performance exceeded our expectations and we are looking forward to achieving record EPS performance in 2007 for the fourth consecutive year.

Our focus on providing products and services for deepwater and Subsea completions positions us to participate in a major secular growth trend currently underway in the oilfield services and product industry. As we said in the press release and as I mentioned earlier, our business outlook for 2007 has improved since our last earnings release. In recognition of our performance during the second quarter and our improved outlook for Subsea projects and inspection, we are raising our 2007 EPS guidance range. We now forecast record EPS for 2007 in the range of $2.95 to $3.10; a growth of more than 30% over our 2006 record.

For specific third quarter guidance, we are projecting earnings of $0.80 to $0.88 per share. After taking into account the production barge San Jacinto contract settlement, we are expecting our third quarter earnings to be about the same as in the second quarter.

Compared to the second quarter, we expect profit contributions from our Subsea products operation to increase on the strength of a rise in contribution from our Multiflex umbilical operations, and anticipate the operating income contribution from our ROV business to show a continued improvement, forecast the Subsea project's profit to be about to be the same, and forecast lower results from MOPS inspection and ADTECH segments.

Looking beyond 2007, we expect worldwide demand for oil will continue to escalate, production from existing fields will deplete, and the price of oil will remain at high levels. Recent announcements of disappointing oil production growth from several major oil companies highlight the difficulty the producers are having growing production. Pemex's declaration that it intends to spend more than $75 billion over the next five year to fight production declines is illustrative of the depletion problem that the world's currently producing basins are experiencing. In this environment, oil and gas companies, our customers, are projected to increase their capital spending, a rising percentage of which is expected to be spent on deepwater fields.

Deepwater is one of the best frontiers for adding large hydrocarbon reserves with high production flow rates at relatively low finding and development costs. Specific signs of a healthy deepwater market that will continue to drive demand for our services and products were evident at the end of June. About 75% of deepwater field discoveries around the world were not yet in production. Over 95% of the existing 204 floating rigs in the world were under contract, and nearly two-thirds of these are contracted till 2008.

60 new floating rigs were scheduled to be added to the worldwide fleet through 2010, and 38 have already secured term contracts with an average length of nearly five years. During this quarter our contract to one of these rigs was announced with a minimum five-year term, and that contract value approaching $1 billion and that won't even start until the third quarter of 2010. Talk about future markets visibility.

As a side note, for the 38 contracted rigs, these new rigs that had contracts by the end of June, 12 have chosen their ROV supplier. We secured all 12 contracts and we will provide 18 ROVs on these 12 contracts.

Based on Quest Offshore's latest forecast over the five years... the next five years: average Subsea production tree orders are forecast to be nearly 550 per year and demand for umbilicals is forecast to average approximately 3,000 kilometers per year. The forecast compared to an average annual demand for approximately 353 orders and 1,500 kilometers umbilicals over the past five years. That's a doubling of umbilical demand.

In view of these market signs, we anticipate demand for our deepwater services and products will continue to rise from current levels and believe that our business prospects for the next several years are excellent. Consequently, we expect our 2008 earnings to be even higher than 2007.

In summary, our quarterly results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well for both the long term and the short term. Our technology gives us operating leverage to take advantage of the high level of deepwater and Subsea completion activity currently underway. The market outlook for our deepwater and Subsea service product offerings is excellent. We continue to believe we are in one of the sweet spots to this up-cycle. We are expecting record annual earnings for the fourth consecutive year in 2007. And with escalating demand for ROVs and Subsea products, 2008 should be even better.

We appreciate your interest in Oceaneering and we will be pleased to answer any of your questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from Stacy Nieuwoudt [Pickering Energy Partners, Inc.].

Stacy Nieuwoudt - Pickering Energy Partners, Inc.

Good morning, guys.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Good morning.

T. Jay Collins - President and Chief Executive Officer

Good morning, Stacy.

Stacy Nieuwoudt - Pickering Energy Partners, Inc.

During the quarter you built 13 ROVs, is this kind of build rate sustainable going forward?

T. Jay Collins - President and Chief Executive Officer

I think our best forecast is what we continue to say is that we believe that on balance we will increase our fleet by about two vehicles a month. If we look at the last 12 months, we've increased by 20 vehicles net and we think that's the best forecast going forward. So, I think in '07, we would see about the same net increase by the end of the year.

Stacy Nieuwoudt - Pickering Energy Partners, Inc.

Okay. That's helpful. And then pricing momentum on ROV day rates, can you kind of walk us through how you expect this to unfold during Q3 and Q4?

T. Jay Collins - President and Chief Executive Officer

Again, it's a fight everyday to pass along cost increase to our clients, so far we've been successful in doing that, and we continue to expect to maintain our margins in this business. So far we've been able to do that and that's our expectation. These are tough guys we deal with though, so it's not an easy task.

Stacy Nieuwoudt - Pickering Energy Partners, Inc.

That's helpful. I will turn it back over. Thanks guys.

Operator

Your next question comes from Neal Dingmann [Dahlman Rose & Co.].

Neal Dingmann - Dahlman Rose & Co.

Good morning, guys.

T. Jay Collins - President and Chief Executive Officer

Good morning, Neal.

Neal Dingmann - Dahlman Rose & Co.

Say, on Stacy's question I am wondering on the ROVs how many disposals are you all looking at or have you said anything publicly for the reminder of the year?

T. Jay Collins - President and Chief Executive Officer

We really don't predict that that's why I just sort of given you the net to a month, is really your best... I think the best forecast for you. Particularly if you look at 2007 as a whole, we got a little ahead of the game by being up 16, but I think by the end of the year 2 a month will be a pretty good forecast net.

Neal Dingmann - Dahlman Rose & Co.

Okay. And then obviously Subsea projects had just a stellar quarter, and you did give us some color on that, we are just wondering for the remainder of the year, similar type projects out there or what are you seeing on sort of the bid activity?

T. Jay Collins - President and Chief Executive Officer

Activity is still strong. Obviously, we are in the middle of the BP project on the platform decommissioning and abandonment. We will see continued revenue along that same lines, maybe up a little bit in the third quarter but margins will go down as there is a lot of pass-through cost in that BP project. And I think we had just a tremendous execution in the second quarter, probably better than our average and better than we can expect on an average basis. So, we see continued good market in that world and just to remind you that we are in the RIM business Inspection, Repair and Maintenance and there are more things being put on the ocean floor every day and every one of those things presents an opportunity for us to either help put it there or go back later and check on it. We really like that long term market as well as the short term hurricane-related market.

Neal Dingmann - Dahlman Rose & Co.

Sure. And to follow that up, when you are looking at, I guess, pricing... you discussed a little bit on the ROV but on the Subsea products or projects. Are there... are you putting sort of additional, I guess for a lack of better word, bells and whistles on things that you are able to pass through some pricing. I guess, what I'm trying to get a sense of maybe the services versus the actual products. If you are able to sort of pass-through on both sides or is it more on one or the other.

T. Jay Collins - President and Chief Executive Officer

I think on the services side, particularly in the Gulf of Mexico and project I think we provide particular value to the client in that we've got the engineering, the ability to make Subsea tools as well as the operational skill, the vessels to do a complete job for our client. So, I think that package really adds value to the client. And we also have tool rentals in the same kind of services on the... in our Subsea tool and rental business as well. On the product side, I think we're just solving the Subsea, the needs of our client routinely, and we're not necessarily adding bells and whistles on the product side but we're solving problems everyday for our clients.

Neal Dingmann - Dahlman Rose & Co.

Okay. And then my last question, obviously, you are generating a nice amount of cash, as you mentioned on discretionary... if you don't see any acquisitions, you see... I guess, that you deem attractive, would you decide to maybe pay down debt or buy shares or... what would be the next in order?

T. Jay Collins - President and Chief Executive Officer

I think we've always said internal investment is the first priority, acquisitions are second, and if we're build up too much cash we have authorization to buyback our shares, but always... and that's always a possibility. We have done it historically in the past.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And in the interim we would pay down debt, so we won't build up cash until our revolver gets paid off, but I mean.

Neal Dingmann - Dahlman Rose & Co.

Okay.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And the way they rank up opportunities is exactly what we will do.

Neal Dingmann - Dahlman Rose & Co.

Okay, okay, thanks guys, keep up the good work.

T. Jay Collins - President and Chief Executive Officer

Thank you.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from Stephen Gengaro [Jefferies and Company].

Stephen Gengaro - Jefferies and Company

Thanks. Good morning. Two questions. The first is on the, I guess, somewhat sensitive topic of ROV pricing and it seems like, if things continue to progress very well... can you give us some indication of the new ROV awards that you've won, I guess, I think you mentioned 18 new ROVs on 12 rigs, are they... how are they priced, is it a long term contract, is it pricing, change on a periodic basis, how does that work exactly. And could you also give us a sense, for kind of directionally where we are going.

T. Jay Collins - President and Chief Executive Officer

Well, we really can't release any information on individual contracts. We negotiate every opportunity individually with the clients. In some cases, we can get some term contract but many of these contracts are relatively short cancellations, but the truth is once we get on rigs we almost never leave the rig. So, I would say you should think of it as continuation of our continued profitability in that sector.

Stephen Gengaro - Jefferies and Company

Okay and...

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And if we do have long term contracts, we do have opportunities to increase prices periodically. We continue to pass along personnel increases in our contracts.

Stephen Gengaro - Jefferies and Company

Okay. Now that's fair, is personnel availability, I mean it's obviously one of your competitive advantages, is that still a big issue in the industry right now?

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Well I think it's a tremendous issue. And let's say we have four training schools going in the world and without that we wouldn't be able to support this growth at all. So, there are no excess people in the industry to hire at all. So, it's all dependant upon training your own people and we continue to do that as a strategic advantage to us.

T. Jay Collins - President and Chief Executive Officer

And I think it underscores with... with all the new people and the new equipment, it underscores our focused on execution because there are a lot of moving pieces out there, and it takes a lot of effort to maintain the margins that we have achieved.

Stephen Gengaro - Jefferies and Company

Okay. And then on the umbilicals front; as we look at... you've obviously, you've won a lot of work. There seems to be a tremendous amount of work ahead of you to possibly when. When you look at your current capacity, would you hazard a guess on kind of the what level of utilization or how close you are running to full capacity right now, and how that kind of plays out as we try to look out into '08 as far as revenue potential?

T. Jay Collins - President and Chief Executive Officer

I really don't have a good figure on that. I would say that... we said we are going to have bigger business in the second half of the year. We've completed our expansion of our UK facility to increase its capacity by about 50%, and we've been ramping up there during this quarter for a stronger second half in throughput up there, in that business and we very much like our position in Panama City in Brazil for the second half of the year. So, it's not really a easy question to answer, and on total capacity, but I think that we expect continued growth in that market in the second half of this year and in '08.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And we have ample capacity in Panama City, and Brazil.

T. Jay Collins - President and Chief Executive Officer

And we do, that's correct.

Stephen Gengaro - Jefferies and Company

Okay. Very good. Thank you.

Operator

Your next question comes from Scott Gill [Simmons and Company].

Scott Gill - Simmons and Company

Yes. Good morning gentlemen.

T. Jay Collins - President and Chief Executive Officer

Good morning, Scott.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Good morning.

Scott Gill - Simmons and Company

Hey, let me go back to the ROV pricing. Just refreshing my memory here a little bit on ROVs, is there a difference in the pricing between those ROVs used in construction and those used in drilling applications?

T. Jay Collins - President and Chief Executive Officer

Not necessarily, Scott. They do operate on a little bit different model. In the ROVs on construction, we get lower utilization because they typically, they're dead spots between construction barges. So there we achieve lower utilization but we also usually have higher manning, maybe a six-man crew instead of a three-man crew. So, we achieve higher revenue per day. At the end of the day, we make about the same amount of money from the two different services.

Scott Gill - Simmons and Company

And what about, if you were to contrast a new ROV versus an old one, kind of a day rate difference between those?

T. Jay Collins - President and Chief Executive Officer

Often the new ROV may have some higher spec equipment on it and have a higher capital cost. So, generally would have a higher day rate than the old one, but not in all cases.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And the people component would be about the same.

T. Jay Collins - President and Chief Executive Officer

That's correct.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And like Jay said, with additional crew on all construction jobs the average revenue per day on construction is higher than it is on drill support. However, when you take utilization into... factor in utilization for the year, the profitability is about the same, so we're pretty indifferent.

Scott Gill - Simmons and Company

I guess, I was just trying to look at the third quarter, and given that the nice up-tick you had in the margins on the ROVs, if the mix was going to influence that at all in the third quarter, but it sounds like, Jay, from what you're saying just kind of keep it... keep those margins kind of flattish, is that right?

T. Jay Collins - President and Chief Executive Officer

I think, we're really have said all along that '07 margins we thought would be pretty much flat with '06, as we pass along price increases to our customers.

Scott Gill - Simmons and Company

And Marvin, did I hear you say that '07 CapEx is now expected to be $200 million, is that right?

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Yes sir. You did.

Scott Gill - Simmons and Company

And you spent what, 1... a little over $110 million in the first half of the year?

Marvin J. Migura - Senior Vice President and Chief Financial Officer

That's correct. And we've got the $20 million announced for Ifokus.

Scott Gill - Simmons and Company

Right that... so, I guess, I am trying to figure what the back half of the year looks like, is that $20 million part of the $200 million?

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Yes.

Scott Gill - Simmons and Company

Okay. So we're going to see a significant slowdown in capital spend?

Marvin J. Migura - Senior Vice President and Chief Financial Officer

We should, unless new opportunities come up.

Scott Gill - Simmons and Company

Okay. All right and then my last question, Jay, on the project work, can you give us some sort of visibility what 2008 might look like, and is Oceaneering ready to make some commitments to the capital or leases for that business next year?

T. Jay Collins - President and Chief Executive Officer

The BP work that we announced already, those contracts go to the middle of 2008. So that's really the long term contract that we have... the Gulf of Mexico construction project business really is a relatively short-term turnover type work. So, that didn't end up with long-term contracts. So, I think other than the BP jobs that we've announced there isn't any visibility that we can give you. And with regard to... we're always looking at the market and looking at our capacity need. So, I don't have anything to announce at this point in time but that we're always looking around to see how supply and demand are matching up and where we can, sort of our customers need. So, good question, just don't have anything for you right now.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And that's about as close as we are going to get to quantifying 2008 on this call.

Scott Gill - Simmons and Company

I had to make a stab at it.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Good question.

Scott Gill - Simmons and Company

Well, thanks gentlemen. Good quarter.

T. Jay Collins - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Thomas Escott [Pritchard Capital Partners].

Thomas Escott - Pritchard Capital Partners

Good morning fellas.

T. Jay Collins - President and Chief Executive Officer

Good morning, Tom.

Thomas Escott - Pritchard Capital Partners

I think all the questions have been asked about ROV pricing and it's... everything that's been said is pretty stout. I mean up 6% quarter-to-quarter sequentially. It sounds like that was spread both from price increases on existing equipment and then some pretty stout new day rates on brand new equipment. Is that a fair characterization?

T. Jay Collins - President and Chief Executive Officer

You know it's a combination of everything, Tom. We take our total revenue and divide it by our total days. So, everything you mentioned, it would be in that mix.

Thomas Escott - Pritchard Capital Partners

Okay.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Plus there is a change in fleet mix to more construction mix. So, you've really got three things.

Thomas Escott - Pritchard Capital Partners

Okay. So that it's all in there, and so it's higher, it's probably significantly higher day rates on a brand new ROV being delivered and going to work, plus mix of more construction related work plus price increases on older existing ROVs with other customers.

T. Jay Collins - President and Chief Executive Officer

I think all those things are in there. That's right.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Yes. That's there.

Thomas Escott - Pritchard Capital Partners

Okay. Thank you. And then on the Subsea products. You've said in the past, and it was true again this quarter that the margins on that kind of move around because of mix issues, and I guess my question is to, do umbilical typically carry a greater mix than say Subsea products or hardware? That's, kind of, one part of that, and then secondly, with all this new backlog. You are up to $370 million new backlog and whatever, is can we anticipate that a lot of that new orders in that new backlog typically across the board are going to carry higher margins than the Company is posting currently?

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Tom there is lot of different discussions that we can do. So, what we did in Jay's remarks was we gave you the answer. We think product margins for the year is going to be 17% to 18%. And, yes, generally umbilical, depending upon mix between thermoplastic and steel tube, umbilical margins are lower than the specialty products. And generally our backlog has better margins than historical backlog did, but all those things taken into consideration, and the way we see our Tee leaves for '07, we're going to wind out between 17% and 18%, operating income margin.

Thomas Escott - Pritchard Capital Partners

Okay. That's a good answer. Thank you.

Operator

Your next question comes from Waqar Syed [Petrie Parkman].

Waqar Syed - Petrie Parkman

Good morning, gentlemen. Great quarter.

T. Jay Collins - President and Chief Executive Officer

Thank you.

Waqar Syed - Petrie Parkman

Couple of questions. First on the ROV side, the four systems that you disposed off, I would assume that they were idle ROVs?

T. Jay Collins - President and Chief Executive Officer

Not necessarily. I know of one system right now that's working and just finishing its last job and that will be its last job. Generally the older ROVs that probably had the lowest utilization but not necessarily idle.

Waqar Syed - Petrie Parkman

Okay.

T. Jay Collins - President and Chief Executive Officer

If they've been idle for a long time, we probably would have disposed of them before.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Or it was... and what Jay is taking about is, we look at when a system comes off of a long time job that it may have been on it's remarketibility and if it is remarketibility is low then... and its net book value is fully depreciated, these were old systems generally, and we look at the future value not whether it's idle, and I agree with Jay, if it been idle for a long time, it would have been retired in quarters past.

Waqar Syed - Petrie Parkman

Okay. So you had crews associated with those four systems already, you had on the payroll?

T. Jay Collins - President and Chief Executive Officer

Again, I don't have the specific numbers but to the extent that they work, which I assume they did some of the time, they would have had some crews working on them.

Waqar Syed - Petrie Parkman

Okay. So, I just want to understand of the 13 new ROVs that you added, how many new crews were you able to train during the quarter?

T. Jay Collins - President and Chief Executive Officer

Well, we really don't release that number. I think we've said in the past that we were trying to hire in the range of 400 people for the year. So, we are out there doing, hiring people as much as we can but we really don't release quarterly numbers on that, but keep in mind that we got to... for all the systems go to work, we have to hire people and hire people for attrition as well.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And our crews are fungible, I mean, they are not dedicated to one system. And we take a supervisor or we promote somebody on the existing crew to a supervisor and we put him on a new system and we train him. So, I mean the... how many we hire during... and train during a specific quarter, I don't think it's giving you a very valid information that you can use other than we have put 13 systems to work with crews.

Waqar Syed - Petrie Parkman

Right. Because in the past you've said that the biggest obstacle to increasing capacity over two a month has been crews, and this time you've either... you've added about 13 new, so you could potentially add 13 if you... a quarter if you see the demand so that... on a recurring basis is that correct then?

T. Jay Collins - President and Chief Executive Officer

I would say, keep in mind that when we put... in order to put an ROV to service. First, we have to build it and then it has to go, probably being installed on a rig somewhere in a shipyard. So, there is a lag between when things might be built and when it actually comes into service, and so there are also shortages of equipment in our ability to build the equipment. We think the net two a month is really pretty good balance of both hardware and people. So, and we think we're basically keeping our customers satisfied, we're not really passing on any great jobs that we want.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And I think if we look at Jay's statistics that he gave, we added 20 over the past 12 months, net.

Waqar Syed - Petrie Parkman

Right.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

And we expect to add an average of two a month for the year. The fact that we did 13 in one quarter is pretty short term and is not relevant.

Waqar Syed - Petrie Parkman

Okay. Sounds good. There have been a number of new drilling rigs announcements, new construction deepwater rigs, have you received any new contracts to provide BOP control systems to these rigs?

T. Jay Collins - President and Chief Executive Officer

I think.

Waqar Syed - Petrie Parkman

In the last three months or so --?

T. Jay Collins - President and Chief Executive Officer

I think in our backlog we --

Marvin J. Migura - Senior Vice President and Chief Financial Officer

We have the one that we announced. And I think --

[Multiple Speakers].

Marvin J. Migura - Senior Vice President and Chief Financial Officer

We are not going to make any public announcements about... I am sorry. We're not going to comment on that unless we make a public announcement.

Waqar Syed - Petrie Parkman

Okay. Fair enough. And then, Jay, just a strategic question; MOPS business, do you really have to be in that business and then the tanker that you have, what are the prospects of converting into FPSO and would you be better served just to outright sell it?

T. Jay Collins - President and Chief Executive Officer

First of all, the MOPS, the rest of our business is certainly not dependent upon the MOPS business. We have historically liked that business and that it gave us a chance to invest significant amount of capital, when we were able to find suitable big project. Clearly it's been an episodic situation where we found a project that fit us. We like owning this tanker at the moment, we are looking at potential jobs. If those jobs don't come through and we always can sell the tanker, and I think we would have a gain in the tanker at the moment. So, we are feeling no pressure really to make any change in our... in operations right there and we will just see what happens.

Waqar Syed - Petrie Parkman

Okay. Great. Thank you very much.

Operator

Your last question comes from Victor Marchon [RBC Capital Markets].

Victor Marchon - RBC Capital Markets

Thank you. Good morning, and congratulations on the quarter.

T. Jay Collins - President and Chief Executive Officer

Thank you, Victor. Good morning.

Victor Marchon - RBC Capital Markets

The first... I actually had two questions on backlog. I wondered if you had the number split for '07 and '08.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

No, we do not, Victor. Sorry.

Victor Marchon - RBC Capital Markets

And second part is, Jay, you had mentioned that you expect backlog to occupy in the second half of the year, can you give us any sense as into is that OIE or Multiflex or is it a combination of both.

T. Jay Collins - President and Chief Executive Officer

Well, I think, it's probably... particularly in Multiflex. In our Quest number that we used show us that Quest view is that only less than a quarter of the jobs that they expect to be left in 2007, actually were sold in the first half of this year. So, that 75% of the business, according to Quest, will be transaction in the second half of the year. And maybe it's the second half of '07, could be the same size as all of '06. So, that seems to be driving, I guess, that's one of the thing we see out there. There seems to be a lot of quotes out there, and we think this... some of the business will close in '07, the second half, and that is a major driver of increasing our backlog in the second half of the year.

Victor Marchon - RBC Capital Markets

The bids are outstanding; it's just a question of timing of the awards.

T. Jay Collins - President and Chief Executive Officer

That's right. Correct.

Victor Marchon - RBC Capital Markets

Okay. And that's really, all I had. The rest of the questions, I had were answered. I appreciate it. Thank you.

T. Jay Collins - President and Chief Executive Officer

Okay.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Thank you.

T. Jay Collins - President and Chief Executive Officer

You bet.

Operator

There are no further questions at this time.

T. Jay Collins - President and Chief Executive Officer

Excellent. Thank you guys.

Marvin J. Migura - Senior Vice President and Chief Financial Officer

Thank you very much. We appreciate your attention.

T. Jay Collins - President and Chief Executive Officer

Bye-bye.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Oceaneering International Q2 2007 Earnings Call Transcript
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