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Cal Dive International Inc. (NYSE:DVR)

Q2 2012 Results Earnings Call

August 2, 2012 10:00 AM ET

Executives

Quinn Hébert – President and CEO

Brent Smith – Chief Financial Officer

Lisa Buchanan – General Counsel

John Abadie – Chief Operating Officer

Analysts

Jim Rollyson – Raymond James

Martin Malloy – Johnson Rice

Joe Gibney – Capital One

Operator

Good day, ladies and gentlemen. And welcome to your Q2 2012 Cal Dive International Earnings Conference Call. My name is [Bela], and I will be your operator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Quinn Hébert, President and CEO. Please proceed, sir.

Quinn Hébert

Okay. Let’s get started. Good morning, everyone. Welcome to Cal Dive’s second quarter 2012 earnings call. With me this morning is Brent Smith, our Chief Financial Officer; Lisa Buchanan, our General Counsel; and John Abadie, our Chief Operating Officer. To follow along this morning in our presentation, the presentation can be found on our website at www.caldive.com, and it’s under the Investor Relations hot button.

Right now I’ll turn to slide two. Our General Counsel has a forward-looking statements message.

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 to 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 the most directly comparable GAAP financial measures, we refer you to our earnings press release and a presentation slides for this call.

Quinn Hébert

Okay. On slide three is our agenda for this morning. I’ll say some remarks and then Brent will review our financials in detail and then we’ll open up the phone lines to Q&A.

Turning to slide four, we experienced higher utilization during the second quarter 2012, compared to the same period of 2011 as demand for our service in the Gulf of Mexico continues to slowly recover.

Unfortunately, we had a tropical storm interruption, our second quarter operating results were negatively impacted by Tropical Storm Debby that moved to the Gulf during the latter half of June and order most of our equipment offshore during that timeframe.

Although, our utilization strengthened, we’re still operating in a pretty competitive market as dayrates for our vessels remained under pressure. For the projects we did perform however, we did have a safe and solid project execution.

On the balance sheet front, we paid down $18.2 million of our term loan in the second quarter. Additionally, we issued $86.3 million inconvertible debt in July. We used the net proceeds from this transaction to repay a portion of the term loan, with the remaining term loan balance outstanding at $49 million.

We viewed this transaction -- this convertible debt transaction swapping secured debt with covenants with unsecured debt with no financial covenants at roughly the same coupon rate. This transaction provides us with long-term financial flexibility and improved liquidity which is important to us.

We acknowledge this convertible debt instrument is potentially diluted to our existing shareholders. But convertible debt instruments such as the one we issued rarely convert before maturity and even then, we have the option to sales in cash like traditional debt. Brent will provide more details on this transaction in his remarks.

Internationally, we remain very busy, in Mexico, we have a nice pipeline project to complete and we have about five projects on our radar screen to bid, about half of which could commence this year.

In Australia, we are excited about the prospects for our newly announced alliance with Fugro in our joint venture the Toisa Paladin. Fugro is an impressive company, in a large, diversified, geotechnical survey and subsea provider with a major presence in Australia.

The Toisa Paladin is a world class asset. She was built in 2007. She is a 100 meter class DSV, diving support vessel with an 18 man saturation diving system. She’s a state-of-the-art ship, capable of working just about anywhere in the world.

We already have booked work for the ship in Malaysia and then in Trinidad that will bring it to the end of the year. Under the alliance we intend to split profits equally between the two partners.

We believe this alliance with such a high spec asset will help us grow our presence in Australia and certain other areas, and we’re very excited about the prospects going forward for the Paladin. Also we started our first project in West Africa and continue to bid for more work in that region.

If you turn to slide five, our backlog stands at about $238 million, which is significantly ahead of last year’s second quarter backlog of $176 million. While the backlog is down sequentially, it’s common for us to build a backlog in the first half of the year so we’re encouraged with backlog level at this point.

To remind everyone, a large portion of our work is performed in the spot market, which never shows up on our backlog. We are the most confidence in the spot market at this time of the year due to the seasonally improved weather conditions offshore in the Gulf of Mexico.

In our present backlog, about 30% of our backlog involves U.S. projects and about 70% are international based projects. Additionally, about 70% of this backlog is to be performed in fiscal 2012 with the remainder in 2013 and beyond. We continually actively bid on a number of projects.

Looking forward, we expect to have strong utilization for our diving assets in the Gulf of Mexico in the third quarter, which has the potential to be slightly better compared to last year’s third quarter, which also experienced fairly healthy utilization levels. However, we continue to express a flat vessel dayrate pricing environment.

For the Gulf of Mexico diving market we see significantly better than last year, we’ll need to experience significant vessel dayrate increasing the spot market which hasn’t occurred yet.

Also, there’s still relatively little new pipeline activity in the Gulf, as this activity lags behind the recent increase in oil and liquid drilling in the shelf. To be clear, however, the leading indicators in this market, in the Gulf of Mexico are fairly strong.

The shelf drillers are busy. Our clients are drilling more oil and liquids offshore in the Gulf of Mexico, and the recent shelf lease sale was very successful with our two largest customers, Chevron and Apache being very active in this recent lease sale.

Internationally for the third quarter, we don’t have as much work on the Chevron and Gorgon project in Australia this year compared to last year, we do have a number of bright spots. The Sea Horizon is working in Australia for the quarter on a time charter at somewhat lower rates but she’s going to be busy through the whole quarter.

The Texas is working in West Africa just about for the whole quarter and we’re also enjoining fairly busy activity levels in Australia in general, and we have this product pipeline project in Mexico to complete. So, international results should be better this year when compared to last year.

Overall, depending on how the spot market unfolds in the Gulf, we should be modestly better for this year’s third quarter compared to last year’s third quarter.

I’ll now turn it over to Brent on slide six to review our financial statements in a little bit more detail. Okay. Brent.

Brent Smith

Thanks, Quinn, and good morning, everyone. Moving to this next slide, it shows our financial results for second quarter. As you can see, our revenues were close to the same level as second quarter 2011, despite the interruption caused by Tropical Storm Debby.

Included in our operating results for the second quarter this year is a $3.5 million gain on non-core asset sales related to the sale of our Singapore office building and our portable saturation diving system. These assets are not going to contribute our -- to our revenue or EBITDA going forward and we’ll continue to look for opportunities to sell other such non-core assets.

The year-over-year net impact was approximately $800,000, as during the second quarter of 2011 we had a $500,000 gain, as well as a $2.2 million bad debt recovery recorded in income.

Our operating results improved year-over-year, primarily due to our cost reduction efforts. In particular, SG&A was $4 million lower in the second quarter of this year compared to last year.

While our operating loss improved compared to 2011, our net loss was slightly higher, primarily due to the unusually high effective tax rate in the second quarter of 2011 of 66%, primarily due to tax restructuring performed during that quarter.

We also generated EBITDA of $10.7 million this quarter, compared to EBITDA of $7.3 million during the prior quarter. We estimate the negative EBITDA impact from Tropical Storm Debby to be approximately $5 million for Q2 of this year.

Moving on to slide seven, I’ll show the utilization for the second quarter of this year versus 2011. Total fleet effective utilization for the second quarter increased compared to the same period for 2011.

The increase would have been greater if not the Tropical Storm Debby, offsetting some of the impact from Debby was that certain assets were paid a significantly lower standby rate and therefore, still included in utilization.

We estimate that utilization would have been 4% to 5% greater if not for Debby. The increase in saturation vessel utilization is primarily due to increased activity for our 4-Point SAT vessel performing salvage related work in the Gulf.

The increase to construction barges is primarily related to the derrick barge Atlantic working in Mexico and the Sea Horizon working in Southeast Asia, and just to further clarify a comment Quinn made, I believe he said Australia, but just to clarify that Sea Horizon is currently working in Southeast Asia.

Moving on to slide eight, it shows our revenue mix between domestic and international. Our international revenues decreased slightly during the second quarter of this year from 2011, primarily due to a reduced scope of work on the Gorgon project in Australia, mostly offset by increased activity in Mexico and for the Sea Horizon in Southeast Asia.

Slide nine, highlights our recent convertible debt offering. As Quinn mentioned earlier, we essentially swap secured debt with unsecured debt by using the net proceeds of $83 million to repay a significant portion of our bank term loan.

The key aspect here is that the convertible debt will be excluded from our leverage ratio covenant going forward. This provides us the necessary financial flexibility and liquidity, as the leverage ratio essentially limits how much we can borrow under our $150 million revolver. This convertible is debt, if it is converted prior to maturity we have the option to set on cash.

As per the accounting impact starting in third quarter, there will be limited dilution in EPS and only if the stock price is above the convergent price. Under this scenario, only the net gain shares will impact EPS dilution.

Although, still under review, we estimate the convertible debt will be recorded on our balance sheet and inception at a discounted value of $64 million and the discount will accrete as non-cash interest expense estimated to be $3.5 million on an annual basis.

Slide 10, shows our net debt levels and net debt-to-book cap, we had a net debt of $149 million at June 30th, which was comprised of total debt of $159 million, less cash of approximately $10 million. The $159 million debt was comprised of $132 million outstanding on our term loan and $27 million under our revolver.

As Quinn mentioned earlier, during the second quarter, we used net proceeds from the sale of the DSV Eclipse and the Singapore office building to repay a portion of the term loan.

Total repayment during the quarter, including the scheduled quarterly amortization payment was approximately $18 million. Furthermore, following our convertible debt offering and related $83 million repayment, the term loan is now just under $49 million.

Slide 11, shows our liquidity position at June 30th, based on our prior existing leverage covenant -- leverage ratio covenant at June 30th, we would have had approximately $10 million remaining in effective revolver capacity due to the borrowing limitation imposed by the leverage covenant.

Moving to the right, we have illustrated the impact from the convertible debt offering. Since the convertible debt is excluded from the leverage covenant, you can see our liquidity has been increased significantly to over $100 million as of June 30th on a pro forma basis.

And finally, we’ve included our non-GAAP reconciliation on the final slide for your information.

And with that, we will now turn it over to Q&A.

Quinn Hébert

Okay, Operator

Question-and-Answer Session

Operator

Thanks. Thank you. (Operator Instructions) And the first question comes from the line of Jim Rollyson of Raymond James. Please go ahead, sir.

Jim Rollyson – Raymond James

Good morning, guys.

Quinn Hébert

Good morning, Jim.

Brent Smith

Good morning.

Jim Rollyson – Raymond James

Quinn, on the new JV with Fugro, can you guys talk about the three-year agreement you’ve got there kind of what the revenue opportunity is?

Quinn Hébert

It’s going to be depending on where we put her but it could be fairly significant. Right now, as you would expect, you bring a new DSV into any market, she’s in Malaysia. I would rather not give out specific details just because we’re in a competitive landscape.

And our competitors can generally back into their rates. But it’s a fairly new asset that’s going to trade at the upper end of the DSV market. She’s ideally suited for Australia which we expect to be pretty robust growth there for the next two to three years. And we think Fugro is the right partner in this area for us.

Jim Rollyson – Raymond James

Does it move the needle, I guess, maybe is one way of asking?

Quinn Hébert

I wouldn’t say it movers the needle for us in Australia. It brings us up. We’ve been looking forth the right platform to step up our game and get to the next level with a floating assets of our own. And that’s what this does for us.

It gives us a lot bigger, accessible market than we previously had with our high spec asset like the Paladin.

Jim Rollyson – Raymond James

Are there any other assets like this that you would consider chartering at some point down the road?

Quinn Hébert

Yeah. I think that’s what you will see from us. I think you will see a lot -- although it’s -- we would have liked the timing to have been sooner but I think what you will see is either sell or charter some of our older tonnage like the Eclipse and then replace that tonnage with newer assets like the Paladin on a charter basis, rather than trying to go in for ownership. And I think that’s going to kind of be a pretty good growth area for us looking forward.

Jim Rollyson – Raymond James

Okay. On the bidding front, you, kind of, crossed over this some of the bids. My understanding is you guys have had a decent amount of bidding going on in Mexico. And can you just maybe talk about in dollars or relative to what it has been. How bidding looks in Mexico and likewise West Africa since you’re there and mentioned more bids kind of what the outlook is for, in numbers?

Quinn Hébert

Sure. In Mexico it’s -- we have about five bids on our radar screen. They’re in the sort of $50 million to $80 million per project in Mexico. That’s going to be a pretty big growth area for us.

In West Africa, we’re working for a contractor and the ultimate client is a super major. And the projects are smaller in scope but we’re looking to build off the backlog that we presently have in West Africa.

Jim Rollyson – Raymond James

And how is profitability kind of…?

Quinn Hébert

Profitability is pretty good. In Mexico, it’s consistent with our traditional margins. In West Africa, as you would expect when you’re the new guys entering a market, we’re a little bit tighter on the margins but we are profitable.

Jim Rollyson – Raymond James

Okay. And last one for me, you guys have done a pretty good job of reining in your cost structure over the last year or so because you’ve had to in this market. If things start picking up and you get some bids in Mexico and overseas, et cetera, how do we think about your cost structure then? Does it stay relatively constrained down here or do you think it flexes up some? Just kind of thinking about how this flows for margins going forward?

Quinn Hébert

I think we still have some capacity in our existing cost structure to take on additional revenues. I don’t look for us to get back to where we were, especially on the SG&A level. I think we’re going to stay in this steady state for a while. I think we have some really good project teams that can work a little bit harder and be a little bit more efficient and stay at this cost level for the foreseeable future.

Jim Rollyson – Raymond James

Great. Thanks, Quinn.

Quinn Hébert

Sure.

Operator

Thank you. And the next question comes from the line of Mr. Martin Malloy of Johnson Rice. Please go ahead, sir.

Martin Malloy – Johnson Rice

Thank you. Could you give us an update on Uncle John and how that’s performing and maybe your outlook for ‘13 and being able to maybe achieve some higher pricing there?

Quinn Hébert

Sure. I’ll let John Abadie take that one. John.

John Abadie

Sure. Right now the Uncle John is performing well. She’s working in a well invention mode for a large Gulf of Mexico customer. Our current backlog carries us through most of 2012. And we’ve got some things on the radar that we’re chasing right now for 2013.

Martin Malloy – Johnson Rice

Would that be an improved pricing for ‘13?

John Abadie

I would say potentially. Our deal with Uncle John was we had to start her out at a certain level. And we’re working and trying to push the margins up for her.

Martin Malloy – Johnson Rice

And just in terms of the Gulf of Mexico, can you talk about where you need to get to in terms of utilization to push pricing up? It sounds like from your competitors as well that the market overall is pretty soft still and difficult to move pricing up. Do you need a hurricane basically to see increased utilization to where you would be able to push pricing?

Quinn Hébert

No. I mean -- this is Quinn. I think what we -- historically what we need in the Gulf is just a sustained periods of utilization to keep the momentum going through so that the sort of basic laws of supply and demand play out in the marketplace. And I think that’s what we’re going to need and we haven’t had that yet.

Frankly, we thought we were getting that this year and then Tropical Storm Debby came in and interrupted the momentum that was building. And so that way our spot market works is that you build back your momentum and you get going and going, and once things get tighter as in any marketplace, pricing generally goes up.

And so I think we don’t need a hurricane to get pricing up but I think we need a sustained period of utilization where everyone is going to be fairly busy at the same time and that hasn’t happened yet in the Gulf of Mexico.

Brent Smith

Yeah. This is Brent. I just want to add something to that. I think if you listen to our competitors, I think we’d agree with what a lot them are saying. It’s that we’re very unlikely to see pricing increase this year. I mean the Gulf of Mexico is very seasonal.

So I think the third quarter pricing is pretty much going to be what it is at this point. And then obviously the fourth quarter slows down due to the winter seasonality. So realistically, the first time you’re going to have the opportunity to see the pricing increase would be next spring when you start ramping up again.

Martin Malloy – Johnson Rice

Thank you. I’ll get back in queue.

Quinn Hébert

Thanks.

Operator

Thank you. (Operator Instructions) And the next question comes from the line of Joe Gibney. Please go ahead sir.

Joe Gibney – Capital One

Thank you. Good morning. Brent, just a question for you, just if you could update us a little bit on capital spending this year and your view a little bit into next year and early days. I’m just kind of curious to get your thoughts there.

Brent Smith

Yeah. On CapEx spending through June, we spent around $32 million. We probably had for the remainder of the year around -- approximately $15 million left. Most of that’s already been paid in July. It was just the remaining dry dock payments. So that’s already out the door as of today, the date of this call.

Looking forward to next year, CapEx would be lower, pretty positive in that aspect barring something unforeseen because obviously this year was ramped up because of the Uncle John major dry dock and conversion to do like deeper water light water intervention.

So I don’t want to throw out a number yet but I would say it would be significantly lower than this year. We don’t -- we have, two or three what I would consider more major asset dry docks but nothing like we had this year.

Joe Gibney – Capital One

Got you. And Quinn, just a question for you just to follow-up on a Toisa question earlier. In terms of incremental charters that you would look at, would you be primarily focused on sort of DP2 sat dive assets? Would that be sort of the sweet spot that you’re looking at?

And also just falling under that -- anything on the well intervention side in terms of other upgrades you could do? I think the Kestrel, you guys talked about maybe was a candidate for well intervention upgrade but you’re kind of limited that to moon pool addition. I was just curious, any thoughts on that front?

Quinn Hébert

Sure. I would think that as we grow the company and come out of this, we’re going to be focused more on DP2 diving higher spec assets around the world. And so that’s what you can expect to see from us going forward.

On the Kestrel, she was doing rig-less well intervention mode. She really is limited as a mono-hull to do any type of derrick-based stuff that we do with the Uncle John or other assets. I think we would be looking for a different platform to expand our well intervention presence to be honest.

I think the first thing we want to do is get the Uncle John going along efficiently in the well intervention market, which is what we’re well on our way doing and continue to build off of that success.

Joe Gibney – Capital One

All right. Helpful. I appreciate it. I will turn it back.

Operator

Thank you. The next question comes from Martin Malloy of Johnson Rice. Please go ahead, sir.

Martin Malloy – Johnson Rice

Hi. Just a follow-up question. When you look back to second half of last year, you all did pretty well as far as paying down some debt. Is there any help you can give us in terms of what the second half of this year might look like in terms of debt pay down, assuming that the fourth quarter is roughly similar year-over-year in terms of EBITDA contribution and the third quarter plays out like you think it will?

Brent Smith

Sure. Obviously, the major change of debt would be our revolver. The term loan, it has a small amortization payment in the third and fourth quarter. I believe after -- it resets now that we’ve done the major repayment I believe it’s around $500,000 per quarter. So that will be minor.

But the revolver -- obviously it will be higher at the end of the third quarter than it is at the end of the second quarter. And that’s very normal for us because you have more working capital needs. I don’t want to give a specific number but it will probably be in that -- my best guess today would be probably be in that $40 million to $45 million range, which is, again, very consistent for us.

And then it will go down again at the end of the year because you slow down in the fourth quarter and you end up collecting a lot of receivables while obviously you have less cash going out the door. For example, in the fourth quarter of last year we generated free cash flow close to $40 million and we did EBITDA of $12 million. Again, that’s because of the receivable.

Now, the thing is, though, that is very subjective because it’s all about timing. You could have a large contract payable receivable of $10 million that gets paid on January 2 and versus December 31. And the other thing that can really mover the needle is construction projects.

So if we win more projects in Mexico, you typically have a pipe-lay procurement aspect of that and depending on how much that can swing your revolver. But all things equal, it would go down considerably by year-end. It wouldn’t be zero but it would be significantly lower than third quarter.

Martin Malloy – Johnson Rice

Okay. And then could you just talk about the thought process behind doing this convertible note issuance versus securing an amendment under the credit facility to give you some more headroom?

Brent Smith

Sure. We needed a more permanent solution on our liquidity. As the slide illustrates, I mean our liquidity was down to $10 million at the end of June, which I think everyone can agree is too tight to run a company and have the financial flexibility to take on certain projects.

So I think we’ve done amendments in the past. That’s more like putting a band-aid on the situation. We really needed to get something that was more permanent. And we definitely view this as debt and it -- I think what was lost on a lot of people was that we were swapping out debt but this was a straight injection of liquidity essentially because of the way the leverage ratio works.

So for us it was definitely the right thing for the company to do. And now we’re little bit more flexible moving forward.

Martin Malloy – Johnson Rice

Thank you.

Operator

And you have no further questions at this time.

Quinn Hébert

Okay. Well, thank you everyone for participating in our second quarter earnings call. We look forward to the third quarter. You have a good day.

Operator

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

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