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Cal Dive International, Inc. (NYSE:DVR)

Q3 2012 Earnings Call

November 8, 2012 10:00 am ET

Executives

Quinn J. Hébert – Chairman, President and Chief Executive Officer

Lisa Manget BuchananGeneral Counsel

John R. Abadie, Jr. – Executive Vice President and Chief Operating Officer

Brent D. Smith – Executive Vice President Chief Financial Officer and Treasurer

Analysts

Jim Rollyson – Raymond James

Martin Malloy – Johnson Rice

Joe Gibney – Capital One

Michael Marino – Stevens

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2012 Cal Dive International Earnings Conference Call. My name is Tony, and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Quinn Hébert, President and CEO. Please proceed, sir.

Quinn J. Hébert

Okay. Good morning, everyone. Welcome to Cal Dive’s third quarter 2012 earnings call. With me this morning is Brent Smith, our Chief Financial Officer; John Abadie, our Chief Operating Officer; and Lisa Buchanan, our General Counsel. To follow along this morning, you could find our presentation on our website at www.caldive.com it’s under the Investor Relations hot button. If you turn to slide two, the forward-looking statements from our General Counsel.

Lisa Manget 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 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 J. Hébert

Okay. Slide three is our agenda, where I’ll make some opening remarks and then turn it over to Brent to review our financial results or detail and then went to Q&A.

On slide four, for the third quarter we had three major impact items, first the Uncle John, her utilization for the quarter was interrupted as the marine riser system provided by unrelated third party didn’t perform according to specification, so operations were halted to repair the marine riser equipment. As a result of this event, the Uncle John didn’t work for significant portion of the quarter and this caused us about $5 million in EBITDA for the quarter.

To be clear, the Uncle John didn’t perform well on the job and the riser system was owned by third party and it was contracted directly by a customer. The good news on the Uncle John front is that she did return to work in early October and she is expected to be busy for the remainder of 2012 and into 2013.

Second event was the Kestrel performance in the third quarter was about $4 million less EBITDA than last year. The Kestrel was working on lower margin this year as compared to last year’s work when the Kestrel was working on a more profitable salvage project. The good news for the Kestrel is that, moving forward, she already started a two-year charter for work in Mexico that’s expected to contribute about $10 million improvement in EBITDA handling for the company.

And then third, we incurred about a $2.5 million loss in a lump-sum salvage project during the quarter. The loss was primarily driven by higher than normal weather delays associated with the cumulative impact at two main storms, Tropical Storm Debby and Hurricane Isaac as well as using the higher cost assets on the project due to scheduling conflicts within our own fleet.

It’s obviously disappointing how these three items affect our quarter as a result actually reflect the hard work of the men and women offshore and onshore who are working hard for Cal Dive. If these events did not occur, our EBITDA for the quarter probably would have been in the $17 million to $20 million EBITDA range. We believe all of the issues affecting the quarter been addressed and they are behind us.

On the bright spot, our international operation has been very busy and successful. In the third quarter, we continue to work on the pipeline project in Mexico for Pemex that performing according to schedule.

In Australia, operations are very active. We previously announced the award of $20 million worth of saturation diving projects in this area. Also, the Toisa Paladin which is a diving support of vessels that we have a 50-50 joint venture with Fugro continues to win work and we are pleased with these new assets of market penetration. We are also conducting successful diving operations around the world, including such areas as China, Malaysia, Mexico, Russian Caspian Sea and West Africa.

During the third quarter, to better align our cost structure and market conditions and they are to be more efficient, we implemented a U.S. domestic restructuring plan focusing three primary areas; first is, consolidate the departments and facilities, headcount reductions and then selling non-core assets. We expect the restructuring to result in annualized savings of about $15 million, $10 million of which will be cash cost savings that will have a positive impact on EBITDA.

We incurred severance charges of $2.2 million associated with the reduction of our U.S. onshore staff. Although it’s always difficult to make such personal reductions, we believe it will be a much leaner and more efficient organization going forward. As part of this restructuring, we expect to close on facility consolidation transactions totaling approximately $9 million in net proceeds in the fourth quarter of 2012 or the first quarter of 2013 and we’ll use those proceeds to repay our term loan.

Additionally, we’ve also reclassified certain non-core assets as held for sale and we expect any net proceeds in those asset sales to be used to repay debt. Brent will walk you through the accounting impact of the asset held for sale reclassification items. The timing of these asset sale transactions is always difficult to predict, but our goal is to repay the majority of our term debt by the end of fiscal 2013.

If you turn to slide five, backlog. Our backlog stands at about $224 million, of which 45% is expected to be performed in 2012. This compares favorably to backlog of $178 million at December 31, 2011 and $221 million at September 30, 2011. In our present backlog, about 25% of the backlog involves U.S. projects and 75% involves international projects. We continue to actively bid on a number of projects. We are also expecting to bid in particular on a number of Pemex projects between now and the end of the year.

Included in our backlog is $20 million in revenue over the next two years for the Kestrel charter because this is a bareboat charter, the EBITDA essentially the same as revenue $20 million. Typically, we need to generate about a $100 million in revenue to have the $20 million of EBITDA in the backlog. So we feel pretty good of where we stand in the backlog at this point of the year. We’ve taken significant steps in terms of domestic restructuring of cost savings and asset sales to put the company in a position to be successful.

Currently, the Gulf of Mexico’s spot market remains fairly stable even with the wind and weather season coming up. If the Gulf of Mexico’s spot market continues to hold together like we expect, we can see our fourth quarter 2012 consolidated EBITDA to be better than this year’s third quarter EBITDA driven by solid international results in the Gulf of Mexico’s spot market continuation. As evidenced of our confidence level in our fourth quarter results, we have more than 80% of our expected EBITDA for the fourth quarter in our backlog.

Looking forward, the leading indicators continue to remain positive for our business. Our clients are drilling for liquids in the Gulf of Mexico, domestic and international client CapEx budgets are expected to continue to increase next year. And international customer project are more oil and L&G weighted among other factors that we are tracking.

Looking out to the first quarter 2013, we are also expecting the first quarter 2013 to be markedly improved from the first quarter 2012. Unlike the first quarter of 2012, we expect the Uncle John to be fairly busy offshore and the Kestrel to be at a long-term day charter in Mexico. We also expect to be fairly busy with our international operation in the first quarter of 2013.

That concludes my remarks and I will turn it over to Brent to walk you into more details on the financials on slide 6.

Brent D. Smith

Thanks, Quinn, and good morning, everyone. Moving on to this next slide, it shows our financial results for the third quarter. As you can see, our revenues were slightly higher than the third quarter 2011, despite the interruption to the Uncle John operations as utilization was higher internationally.

Offsetting the increase in utilization was lower margins on certain assets namely the Kestrel and a loss incurred on a lump-sum salvage project brings that normal weather interruption during the year, most recently due to Hurricane Isaac.

As Quinn stated the good news that the Uncle John has just returned to work and the Kestrel is now on a two-year chart that will result in annual EBITDA of approximately $10 million, an improvement of $10 million from 2012.

Included in our third quarter 2012 results is approximately $2 million in severance charges and non-cash impairment charges of approximately $21 million. Partially offset by non-cash gain relating to a marked-to-market adjustment on the derivative liability related to our convertible notes.

As Quinn mentioned earlier the severance charges related to our domestic cost reduction efforts in restructuring. We consolidated certain departments to be more efficient. We expect the cost savings to improve EBITDA by approximately $10 million in 2013. The impairment charges relate to non-core order assets that contributed little if any EBITDA over the last few years. These were assets we will mark it and try to sell over the next year that are classified as held for sale on our balance sheet.

We are optimistic we will be able to complete the sales of two of our under-utilized facilities by year-end for a total proceed up to $9 million. Any proceeds will be used to repay debt. The marked-to-market adjustment of approximately $5 million after-tax related to derivative liability associated with convertible debt and is quarterly adjustment will depend on our stock price. The adjustment of non-cash and has no impact on our debt covenants. We also generated EBITDA of $11 million this quarter compared to EBITDA of $21 million during the prior of quarter.

As Quinn laid out in his opening comments we estimate the negative EBITDA impact from the Uncle John interrupted operations to be approximately $5 million on the Kestrel produced approximately $4 million less in EBITDA than prior quarter. And the loss on the salvage project was approximately $2.5 million during this year’s third quarter.

Moving on to slide 7, it shows the utilization for the third quarter of 2012 versus 2011. Total fleet utilization for the third quarter increased compared to the same period of 2011 primarily due to increase international activity. The increase in the saturation diving vessels is mainly due to the Texas working for 90 days in West Africa. During this third quarter compared to no utilized days during the third quarter of 2011. The saturation vessels in the Gulf of Mexico were down slightly mainly due to the interruption to the Uncle John operation. The increase in construction barges is primarily related to the Sea Horizon working in Southeast Asia for 76 days, during this year’s third quarter compared to only one day of utilization during the third quarter of 2011.

Slide 8, shows our revenue mix between domestic and international. Our international revenues more than doubled during the third quarter of this year compared to the same period 2011, primarily due to increased activity in Mexico and for the Sea Horizon in Southeast Asia.

Moving on to slide 9, it shows our net debt levels and net debt-to-book cap, we had net debt of $152 million at September 30, the $162 million of debt was comprised of $43 million outstanding in our term loan, $33 million outstanding under our revolver and our $86 million convertible notes.

A conjunction with our strategy during the third quarter we used net proceeds from a facility sale to repay approximately $4.8 million of our term loan. Furthermore and as I mentioned earlier, we are in the process of selling two of our other facilities that we are not fully utilizing. This is expected to result in the proceeds of approximately $9 million, which will be used to further reduce our term loan.

Slide 10, shows our liquidity position. I wanted to make sure to adequately explain our liquidity situation. Since we are in compliance with all of our debt covenants at the end of the third quarter our liquidity or revolver availability is not limited in anyway by any debt covenants going forward during the fourth quarter as long as we are in compliance on December 31, 2012 at the point in time measurement only.

We fully expect to be in compliance based on our EBITDA outlook for the fourth quarter, and we also amended our credit facility to increase to permitted leverage ratio to five times at December 31, mainly to allow for any unexpected event to be clear we were forecasting to be in compliance with the prior ratio limit of four tons. As far the amendment our revolver size will be $125 million going forward, which we feel is more than adequate based on our historical usage. Completing the facility sales by year end would also provide even more cushion as the proceeds would further reduce debt.

And finally, looking forward to first quarter of 2013 and as Quinn stated we expect a strong EBITDA recover, which were of course filled even more cushion under our financial covenants going forward. And finally we’ve have included our non-GAAP reconciliations on the final slide for your information.

And with that we’ll turn it back to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jim Rollyson of Raymond James, please proceed.

Jim Rollyson – Raymond James

Good morning, guys.

Quinn Hébert

Hey, Jim, how you are doing.

Jim Rollyson – Raymond James

Good. Quinn on the cost savings restructuring where you’re going to get $10 million in cash cost savings plus another $5 million. Can you talk about the kind of timing of that as that it sounds like you already underway I’m just curious if you felt any of that impact in 3Q or just kind of how – when you get to that full run rate of those benefits?

Brent D. Smith

This is Brent, I can take that. We really didn’t have much of a benefit in 3Q, because lot of that stuff was set in motion or completed at the very end of the third quarter and some of it during the fourth quarter still coming in progress, there are some staff relating to various operations, things that will be implemented towards the end of the fourth quarter.

So I think we will have some cost savings, but I think the full run rate probably won’t be achieved until the first quarter, so the $10 million takes that to account, so we expect the full $10 million improvement in ‘13.

Jim Rollyson – Raymond James

Brent, just when we think about that in terms of the G&A impact of that, what do you think of reasonable run rate is for G&A starting in the first quarter?

Brent D. Smith

I think basically we think the G&A impact for next year will be around $4 million, so I will think that, I would just go quarter-over- quarter, so the first quarter of ’12, I would just reduce that by about $1 million for right now that’s probably pretty good estimate.

Jim Rollyson – Raymond James

Okay, that’s helpful. And then on the assets held for sale side of things you’ve talked about the facilities, I guess when we look at the vessels and what not you had on the books for $42 million you basically wrote that down to about half you think, $21 million is kind of your best ballpark guess and what you might be able to get to that stuff sometime during the next year.

Brent D. Smith

Yeah, at this point that’s what we think, we’ll be able to get done between now in the end of next year, these asset sales are always timing is always tough to predict. That’s our best estimate at this point.

Jim Rollyson – Raymond James

Do you have any leads on that yet?

Quinn J. Hébert

Yeah, we obviously had some leads on certainly on the facilities that I have mentioned, we have believed, and we have some other interest in certain assets, but your interest speaks now and then and sometimes it goes away, so this kind of a very fluid situation, but we took a very realistic approach on what to impair these assets down to from the prospective but we’re willing to accept for proceeds that we do forgot about that $21 million.

Jim Rollyson – Raymond James

Okay, that would go long ways towards helping, knock down the term loan so that’s good.

Quinn J. Hébert

Yeah.

Jim Rollyson – Raymond James

On 2013 couple of questions, kind of how you’re thinking about dry docs or what the schedule looks like and then same thing on CapEx, how you are feeling about CapEx levels for next year, and given some of the improvements like with the Kestrel and Uncle John and what not? And just how you’re thinking about your free cash flow position?

Quinn J. Hébert

I could take part of that and I probably turn over to John on specific timing on the CapEx, for 2013, we’re still finalizing our budget, but we kind of have a target of about $30 million in CapEX for next year, which we’ll predominately be your maintenance related dry doc type CapEx. I think, as far as free cash flow, we feel very good about free cash flow for next year, because you can kind of back into, we don’t need a real high EBITDA level, to be a free cash flow positive on $30 million of CapEx, because we’re really not in the cash taxpaying position for the most part, and won’t be next year and then our cash interest is around $8 million, so that’s the good thing, so with the EBITDA recovery that we kind of touched on in the opening comments, we feel good about free cash flows for next, I don’t want to get specific beyond that, but other than we feel good about it. John, you may want to talk little bit about timing on CapEx.

John R. Abadie

Sure, Jim, most as normal we tried to perform most of the dry docs outside of the heavy working season. So I would say that the bulk of our CapEx probably 80% that will be performed during Q1 Q2 of next year.

Jim Rollyson – Raymond James

It is the dry doc schedule heavier right next year?

John R. Abadie

It’s not normal, it’s amazing.

Quinn J. Hébert

It’s definitely is lighter than the last year from the perspective of the vessels that are in there, for example we won’t have the Uncle John or Kestrel and dry doc, which were really hurt our EBITDA in the first quarter. Mostly the other assets that will be in dry dock this year, they weren’t going be working that much in a ways to the EBITDA impact, I would say from the downtime will be significantly less.

Jim Rollyson – Raymond James

Great, that’s very helpful. Thanks guys.

Quinn J. Hébert

Alright.

Operator

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

Martin Malloy – Johnson Rice

Good morning

Quinn J. Hébert

Good morning.

Martin Malloy – Johnson Rice

Could you talk little bit more about the Pemex bidding opportunities may be the timing in the magnitude of the projects that you’re bidding on there?

Quinn J. Hébert

Sure, John take that one.

John R. Abadie

Sure Martin. We expect Pemax to continue to be a pretty consistent flow bid activity coming in. We are currently pretty active in Mexico right know, as we anticipate through next year. At the current time not only we were working direct for Pemax completing a project, which is due to be completed in December of this year, but we’re also working for two other major international contractors on subcontract basis performed on portion of the work what that they have done, so I think from the bid level, we probably expect about five or six bids between now and this first quarter that would have an impact on first half of 2013 in the pipeline standpoint.

Martin Malloy – Johnson Rice

Okay. And then any update on Cape Wind that you can provide us with.

Quinn J. Hébert

It’s pretty much the same as last quarter; they are still working towards finalized in the financing of the project with the expectation of being at position to close that somewhere around early part of Q2 of next year.

Martin Malloy – Johnson Rice

Thank you.

Quinn J. Hébert

All right.

Operator

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

Joe Gibney – Capital One

Thanks, Good morning, Brent question, just trying to understand the nature and perhaps location of the under-utilized facilities which you are potentially looking to sell again just trying to understand specifically what’s coming out?

Brent D. Smith

Yeah, there is couple of facilities in Louisiana that’s kind of uses our operation support and we kind of over the last couple of years consolidated, there is one facility, for example in Port of Iberia that we’re really not using that we’ve been trying to sell for little while, and then just another facility that due to cost reductions and other efficiency improvement, we don’t need quite that size and we are looking to do different things, so it’s really just in general with kind of consolidating and being more efficient. Obviously we were more spread out facility wise during the peak hurricane years. And we kind of needed that infrastructure. And right now with this current operating environment in the same amount, so that’s really what that is.

Joe Gibney – Capital One

Okay, fair enough. And Quinn just dig deeper in your reference to Gulf of Mexico spot currently being stable is that more from a pricing standpoint certainly weathers and somewhat favorable so far appeared in the quarters that’s more than utilization (inaudible).

Quinn J. Hébert

I would say its s more of the utilization point of view. We’re still Joe, fairly busy across the fleet. For example we had scheduled a offshore manager’s meeting this week to talk to all of our leader ship team offshore and they’re all were still have to be schedule that, which I like to do because that means that they’re offshore earning revenue, so I think right now we just see it pretty healthy utilization push through the middle of the fourth quarter.

Joe Gibney – Capital One

Okay, helpful I appreciate guys, I’ll turn it back.

Quinn J. Hébert

Sure.

Operator

Your next question comes from the line of Michael Marino from Stevens. Please proceed.

Michael Marino – Stevens

Good morning.

Brent D. Smith

Good morning, Mike

Michael Marino – Stevens

Brent, I just want to clarify couple of things one on the facilities that are for sale that $9 million are those facilities included in the book value number that you gave for $40 million, I think $42 million.

Brent D. Smith

Yes.

Michael Marino – Stevens

Okay, and then on the project, I guess that when that lost $2.5 million bucks in the third quarter was that completed in the third quarter?

Brent D. Smith

It was not completed, it will be completed during next spring, but of course under the accounting rules based on the estimates we have, we feel that we were accrued the entire loss, because it’s a lost contract, so basically if everything goes as planned we will complete that project next spring basically a break even mark.

Michael Marino – Stevens

Okay. And was the issue they are just weather, so it was just kind of just (inaudible).

Brent D. Smith

Weather kind of drove a lot of it obviously, because the project started actually earlier this year, and then the Tropical Storm Debbie impacted it. Then Hurricane Isaac impacted it. So we tried to have a cumulative unexpected issues there, and then also it kind of made us reshuffle the debt a little bit on through the scheduling conflicts that are assets, we had to put certain assets on the job that frankly weren’t as efficient as some of assets would have been, so it’s really a combination of the weather and then forcing our hand little bit out to scheduling conflicts, so just kind unraveled from there so to speak.

Michael Marino – Stevens

Okay. And then finally Quinn you mentioned the Uncle John some visibility even Q1 of next year, I know historically I think you guys have had some pretty good contract work with that vessel and some guaranteed minimums from a least one big customer, is that still the case with the Uncle John, and may we can expect some really good utilization for next year or?

Quinn J. Hébert

Yeah, I mean I think she is going to be fairly busy, she is the unique asset, she is the one of the few deep semi submersibles in the Gulf of Mexico available for riserless and marine riser intervention and she is also a saturation driving vessel, so we are expecting her to be fairly busy.

Michael Marino – Stevens

Do you have work contracted for?

Quinn J. Hébert

Yes, we do have work contracted through the fourth quarter into 2013 and you would expect we we’re bidding her, every day.

Michael Marino – Stevens

Right, okay, thank you.

Quinn J. Hébert

All right.

Operator

We have a follow up question from Mr. Martin Malloy, Johnson Rice, please proceed.

Martin Malloy – Johnson Rice

I just wanted to ask about maybe some of the other vessels that you have that the Mystic Viking and the Constitution. Are there opportunities to maybe upgrade or invest in some of these vessels to make them little more capable in mid water depths?

Quinn J. Hébert

That’s a good question, but not the short answer is not really, I mean they are based on the size of their ship really dictates what the deck load capacity is and better about whether they need to be in terms of capabilities, and I think what you can see from us going forward is attempting everything like we’ve done the cash flow and put some of our older tonnage that’s still capable on longer term charters and then add newer assets like the Toisa Paladin for example to our fleet. Think that the better way for us to upgrade our capabilities and is probably more efficient as well.

Martin Malloy – Johnson Rice

Okay, and then the Sea Horizon of Texas have big improvement year-over-year, can you talk about the outlook for those vessels?

Quinn J. Hébert

Sure, the Texas right now we feel pretty comfortable, she has booked through the end of the fourth quarter into the first quarter in West Africa and we feel reasonably comfortable she’ll have pretty high utilization through Q1 of next year and the Sea Horizon we based on the market outlook right now in Southeast Asia, we anticipate yield vision levels next year pretty similar to what we seen this year.

Martin Malloy – Johnson Rice

Okay, thank you.

Quinn J. Hébert

All right.

Operator

Ladies and gentlemen, I would now like to turn the presentation back over to Mr. Quinn Hebert for closing remarks. Please proceed sir.

Quinn J. Hébert

Okay, we will thank you everyone for joining us this morning on our third quarter earnings call. We were all working hard for owners and I want to thank you all the Cal Dive employees worldwide for working hard and safe and we will see you for the end of year call in 2013. Thank you.

Operator

Thank you for your participation in today’s’ conference, this concludes your presentation. You may now all disconnect. And have a great week.

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