Good morning. My name is Stephanie, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Oceaneering's Fourth Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Investor Relations.

Thank you, Stephanie. Good morning. And welcome to the Oceaneering’s fourth quarter and full year 2018 results conference call. My name is Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations. This is my first earnings call in my new investor relations role and I look forward to working with everyone in the investment community. Today's call is being webcast, and a replay will be available on Oceaneering's website. Joining us on the call are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments. Alan Curtis, Chief Financial Officer, and Marvin Migura, Senior Vice President. Before we begin, I would just like to remind participants that statements we make during the course of this call regarding our future financial performance, 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. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our fourth quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Good morning. And welcome to the Valentine's Day installment of our call. Today I'll focus my comments on our performance for the fourth quarter and the full year of 2018. The market outlook for 2019, business segment outlook for the full year and first quarter of 2019, and our commitment to cast capital discipline and generating positive free cash flow in 2019. Now moving to our results. In our press release for the fourth quarter, we reported a net loss of $64 million dollars or $0.65 per share on revenue of $495 million. These results included the impact of $71 million of net adjustments primarily related to $76 million of pre-tax goodwill impairment in our subsea projects segment. Adjusted net income was $7.3 million or $0.07 per share. Overall, our adjusted operating loss of $20.7 million and adjusted EBITDA of $31.1 million were in line with our expectations, and we were pleased to report continued growth in our advanced technology segment where we achieved record earnings. Looking at our business operations for the fourth quarter compared to the third quarter, our adjusted operating income was $19 million lower than that of the immediately preceding quarter, due to reduced profit contributions from each of our energy segments, most notably in our subsea products, and subsea projects segments. The decline in the financial performance our energy segments was somewhat mitigated by the strong quarterly profit contribution from Advanced Technologies. For ROVs, overseas operating income was down resulting from an approximate 8% reduction in revenue on 8% fewer days worked. Our fleet utilization for the fourth quarter was 52% down from 56% in the third quarter. The quarterly decline and the utilization percentage of our ROV fleet was primarily attributable to seasonality associated with the global vessel market. Our fleet used during this…

[Operator Instructions] Your first question comes from Kurt Hallead with RBC Capital Markets. Please go ahead.

Good morning, Kurt.

Hey, good morning everybody. Thanks for all the details, really helpful. As usual if you don’t mind though I may want to address one particular thing looking at your first quarter 2019 guidance if I may; in your commentary you reference a substantial decline in profitability. That’s pretty clear question then becomes that they might assets on some other conference calls. How do you guys – what’s your definition of substantially if I were to think about that in percentage terms?

I think the easiest way look as, we probably not going to get percentages, Kurt, at this point in time, but I think the area where the largest increases is quarter over quarter is going to unallocated. I think I would look at that area and I think we would discuss the Advanced Technology segment that would down quite a bit from the quarter – fourth quarter results as well. I think all of the – the sum of the total of the energy segments we see relatively in line with what we had in fourth quarter.

Got you.

I think the math kind of falls out.

Okay. Appreciate the additional color. Now, just in terms of the – let’s say, if you take a look at the ROV business, there is obviously been a – I think we count sort of like 2o, 25 floating rigs that are effectively on the way back into the market after being featured a couple of years. I know in the last conference call you mentioned some challenges relating to having to go from short-term work. Any additional color beyond what was provided maybe in your press release? Are you seeing maybe more extended durations or if not, can you talk us through how you are kind of managing those short-term switches to maximize your profitability?

I think, one of things is its – well, it’s a not a huge change. We are seeing slightly longer commitments and it is -- it's going the right direction. And then from a management standpoint, one of the things that we’re doing is, we really our position. We really like having units on rigs because it gives us preferential opportunity to have. We’re already the cheapest option if we're already, there's -- that's where you, and when we talk about having some of these small opportunities to increase price that's probably where they’re going to happen is we’re already forward position. But on the ones where we switch; one of the things that we’re -- just like everything else's, we will make sure that we got a great ROV, something that's ready to go and fully operational. But if we start to see need for people asking for upgrades or additional capabilities or other things that's where we’re going to have to be very diligent about passing those costs on who are customers because if we do that more often and every time you move somebody ask for something extra, we have make sure we collect from that. And one of the best ways to mitigate some of that switching cost.

Yes. And Kurt, just from a margin perspective, our guidance is in the upper 20% range for EBITDA margin which is consistent with kind of what you saw us report in Q3 and Q4. So we do see that it’s not dropping any further in our guidance, but we don't see a significant appreciation at this point in time.

And Kurt, this is Marvin. While rig contracts have been a short duration. Let us remember that most short duration rig contracts last longer than the vessels churn that we really see the activation and deactivation of short-term work for the vessel callout market. So, even if rigs stabilize we still got that extra cost that we’re trying to cover in the margins, as Alan alluded to what they're going to be. But until we see a more sustained level of offshore activity, we've got starts and stops on a lot of boats around the world.

All right. Thanks. Appreciate that.

Your next question comes from Scott Gruber with Citigroup. Please go ahead.

Yes. Good morning.

Good morning, Scott.

Thanks for all the color and the cash items, one follow-up there. With the top line growing in 2019 can you talk to your ability to limit working capital expansion to ensure positive free cash generation?

Yes. I think what we’re looking at is we’re going to have some performance improvement plans in place looking at our receivables that we feel very confident about. We also look at a lot of the larger contracts that we’re looking at have a progress payments associated with them as well that won't require funding of those. So we feel pretty confident that we can grow the top line without having to grow receivables.

And as we mentioned, Scott, so much of the revenue growth is coming from products which is a big contracts and that's what Alan just discussed that we’re being very diligent in our contracting terms to make sure we're not going out of pocket or trying to go out of pocket as little as possible for a big ticket items.

And then, Rod, I want to ask about a few of your non-oilfield technologies which are very interesting. You noted performance within your automated guided vehicles business improved during the quarter. Can you provide some color on roughly what percentage of your Advanced Technology segment? Did the AGVs represent today? Where they stand from a margin standpoint relative to segment margins?

So, its still, we don’t break it out. But it still a little brother to Ocean -- or to the Entertainment group. But let me give you a little bit of color, Scott, one of the things that we’ve done so well in the entertainment business that you've seen -- you really see us take advantage of the last year or two is that we've gone us from really great standard product that then were able to make very small changes to the platform to capture some of these large contracts. And in doing so we just got the deliverability much higher than it was in the past. And so learning that same and we’re – when we’re working that into the same sort methodology in the AGV business as well. And that's part of that improvement that we're already starting to see is this this standard products that we can deliver quickly with very low risk and very low uncertainly and that's what's really driving that performance. And I would just say more to come. That's what we're talking about in 2019 as well.

Yes, sure. If I can just sneak in another one. Could you just talk about where you think kind of the growth potential for the AGVs as well as the people-mover, the REVO-GT?

I mean the activity is or the application obviously is very broad. Right now a lot of our AGV business is pretty focused on the automotive industry, automotive manufacturing industry but between that and people-mover's expanding more into warehousing actually taking a look at some projects where we're operating outdoors doing similar kind of work. That is almost unimaginable how big that opportunity can be but it's just a matter of how quick bid auction rates are.

Would you offer gas in terms of kind of revenue size or with the over three to five years?

I don’t think I can get the time here right, Scott. But I just like I said I think we're encouraged by the breadth of the market and we're just going to have to try to drive that rate of change as quickly as possible.

Got you. Will continue to watch, thank you.

Thanks.

Your next question comes from Edward Muztafago with Societe Generale. Please go ahead.

Hi, guys.

Hi, Edward.

Thanks for taking the question here. I wanted to maybe think a little bit about pricing in the ROV market and if we look at what's being going on with the jack of market, in floaters, I hate to drop parallels between different businesses here. But it seems like pricing is moving at a little bit better rate than I think what a lot of us would have thought given the excess supply. Would you have sort of guess as to whether you think maybe there is the potential for a similar dynamic in the ROV market and are you guys at least seen any evidence now that maybe it's a little bit easier to move pricing up than you would have thought?

I don’t see any huge opportunities there. What I would say is we look for places where the value is differentiated. Just like heavy weather rigs for example, where we saw some great movement on heavy weather rigs to use one of those analogies. And I think where we start to see whether it's a remote operation where you were or uniquely positioned to have the closest back up the closest parts available or we can really help them maximize sort of a value proposition where we've got ROV and survey and tooling and communications on the rig. Those opportunities which obviously stand out in remote places, I think those are some of the unique niches that we talk about that we try to put pressure on, we try to make those pricing moves. But again, as a percentage of the whole, they're not huge. So, we'll just have to look for those who expand into other places.

Okay, that's helpful. I mean, there seems to be a bit of well timing rather rig wise that there is a recognition, everybody's got to earn their cost to capital and that's sort of behind it but time will tell I guess. And then, maybe as a follow-up, I just wanted to think about how the mutual liability Ocean Evolution and of course the riser contract in Brazil sort of play into the growth outlook for 2019 and I think you said that Ocean Evolution starts in 2Q and I think the riser contracts starts in 2Q but not really clear how they're lowered if they're early in the quarters or at the later quarters?

Sure. So, let me talk about, I'll start with the riser contract. The riser contract really is going to more than anything is going to affect our CapEx this year. Because the work doesn't start until late 2019, so fourth quarter. So, that's more of it we'll be talking about CapEx but we'll also be talking about building our relationship with Petrobras on the services side. So, that's an -- it's a late year impact on the revenue side. For the Ocean Evolution, it again it's more of a cost shift, it's more of when you talk about the interest and everything else, it's coming in there. But when we talk about revenue gains, we've been doing I think very good with the help of our third party vessel suppliers in capturing whatever work we have available to us in the Gulf of Mexico through 2018 and before. So, what we're talking about is actually doing more of that work in our vessel and then using those third party vessels to go out and capture any upside to that. So, it doesn't I don’t think it creates a huge topline opportunity but it's going to definitely give us some capability improvement and some other things as we put on both to use.

Okay, that's helpful. And does it then provide a little bit better cost absorption potential?

I think what you see a difference in is it will be showing depreciation versus the cash cost associated with that vessel.

Okay, that's helpful. Thanks then.

We replace it.

With replacing, replacing one over releasing.

Well yes, per size.

Your next question comes from David Smith with Heikkinen Energy. Please go ahead.

Hi good morning and thank you.

Good morning, David.

Good morning.

So, for the ROV segment, the numbers you provided I think implied drill support days that were up almost 5% in Q4 versus Q3, which is really impressive as the contract floating rigs in the contract, looks like it was down about 7% I think in time period. Just trying to reconcile that divergence. I assume market share is a factor but I wanted to ask if there was anything enormous in the quarter any shift in the number of rigs using two ROVs or anything else that might stick out?

No, there is nothing materialistic like that, David. I think a lot of it was the seasonality associated with vessels in Q4 that work in Q3 and we did expect to see the uptick and more drill rig days in Q4 based on the ones if we were placed on going to work.

Yes, so there is a moment in time when we do see that that market share starts to shift, I think you nailed that. That's going to be the most meaningful change in the quarter.

That's great. And just wanted to confirm that I heard the answer to Kurt's first question correctly. Did you say an allocated expenses should be the biggest sequential impact in Q1 versus Q4?

Between advanced technologies and unallocated are the two largest components.

Okay. You didn’t say that that one was larger than the other.

If I did, I did not mean to, non-intentional.

Okay. And the firm think about advanced technology as a result more in line with kind of Q2, Q3 levels from last year or should we be looking at something closer to Q1 levels from last year?

No, not as -- closer to Q2, yes being more but not going back to operating income contribution with Q1, David.

Correct. That helps a lot, thank you.

[Operator Instructions] Your next question comes from Sean Meakim with J.P. Morgan. Please go ahead.

Hi, good morning.

Good morning, Sean.

Good morning.

So, on the free cash flow target that you laid out there, just how much flex would you say is in the CapEx budget and do you think you'll be able to stay free cash flow positive if you end up with the lower end of the EBITDA range? I think you mentioned this -- I was hoping also is part of that maybe you can just reaffirm the expected use of cash for working capital at the midpoint of the range and as we think about the lower end, could working capital be a source of cash if you're in towards the lower end of that range. Just trying to think about how some of flex points help us think about or you bottom down on EBITDA relative to the free cash?

I mean, I would, Sean I would just say you got all the leverage and I think directionally it'd be hard to sell them all up. We've kind of spoken to we've got a good amount of flexibility in the CapEx taking away the payments on the Evolution, taking away the what we have committed to the drill pipe riser and a couple of other contracts where we've been placed. But we do have some flexibility there. And obviously we would expect working capital if you get to the low end of the range to your point, that you free up some working capital, so but I couldn’t get you this. I don’t think I had venture the sums because it's hard to know if it goes down where it comes from. And sometimes that makes it more difficult. Alan?

Yes. I think on the CapEx side, most of the 40 to 50 is obviously maintenance CapEx and pretty hardwired but we will be looking at everything as Rod said in the call that everything is going to be looking at for return in near term cash flows and even in that sector of spin. Looking at the drill pipe riser and the work associated with the Evolution, we had a -- we gave you all a pretty wide range last time on the Q3 call on CapEx for 2018, as it a $100 million to $140 million because we didn’t know the exact timing of when some of the payments on the Evolution and on the drill pipe riser along lead items would be made. So, we saw that it could have been up to $140 million at that point in time, they came in at a $109 million. So, I think that kind of speaks to those $31 million that and we've heard other people pulled money and '18 so they could show year-over-year decrease, we did not do that. We let the chips fall where they may. And so, there was $31 million, could have probably been pulled in to '18 that rolled over into '19 and is part of our guidance range.

Got it. Thank you for that details, that was really helpful. If I could maybe just talk about subsea projects a little bit. I was curious as how you see the spread of potential outcomes for that business across '19 maybe between revenue and EBITDA just giving the moving pieces that could impact utilization in mix. I think you said earlier that some pricing improvement during the peak seasonal periods could be a benefit. Just maybe could you expand on that a little bit and I'm trying to think about those the moving parts in that segment and how wide the range could look in '19?

I mean Sean, you're on -- and I know you asked the question because you're on to, that's a big part of our upside always. This projects a good season more IMR or more intervention that drives projects up particularly in the Gulf of Mexico. And if it happens during the season and a lot of these boats get used up, that's our kind of that's our upside; a big part of it. So, I think if we can see higher than seasonal expected seasonal activity, it gives us a chance and not just draw the topline but also get those things at a better price. So, it is a big part of it. How much, trying to quantify that swing, it's just really hard to do because it's activity and weather dependent.

Yes. I think when you look at projects, so much of it is call out type nature this year compared to last year as Rod alluded to, we don’t have the larger project in backlog going into the year. So, this is one that if activity levels pick up in the IMR space, it could be good but if the phone doesn't ring, it also has that impact as well.

And let's remember that we have survey and renewables in our project business as well and we alluded to a lot in the contracting activity in the renewables business unit. So, take away from that is what Rod said. This is the one which kind of end -- and Alan about that term call out where all of this is let me say in another way a higher percentage of projects revenue is speculative as in not fix or book going into the beginning of the year. So, your crystal ball is pretty good and we just go our numbers and we got job-by-job decided which ones we think will win and that's how we come up with our guidance. But a lot of activity can happen that we don’t know about yet.

Yes.

That's really helpful. I guess there's one more clarifying piece, then as you think about the midpoint versus the upside of the overall guidance, would you care to maybe force rank across the segments which has the most the biggest contribution versus the smallest to that potential upside or we put projects at the top of that list?

Yes. Sean, yes, our business pretty well. So, you look at the things that are like look at the service and rental side of products, that can surprise the upside. We start getting some of this work that we projects or IMR work. That hits high there. So, really those two are really the strongest ones to give us that positive upsides price, so.

Yes, makes sense. Thank you, very much.

Your next question comes from David Smith with Heikkinen Energy. Please go ahead.

Hey, thanks for letting me back in.

Yes, welcome back Dave.

Thanks. On subsea products, do you have the revenue split handy between the manufactured products versus service and rentals or do we just need to wait for the 10k?

All the way for the 10k.

Alright, I appreciate it. And last is the, you had a nice trio of umbilical awards announced last month, think about over 80 million of which 70% was expected to be booked in Q4. Just wanted to double check if that was included? Because I guess, the implication is, other product orders were begin on the low side of where they been? So wanted to check that and then also ask if there was big that you’re looking to book in Q4 that may have slipped into 2019?

Yes. I mean I think you got it. With those ones that you asked about we’re already booked. But as far as big things coming up and we alluded to it here when we talked about strong activity in early 2019 we were named in the recent Anadarko announcement for the Mozambique development as the preferred bidder. So that's a very large contract for us and that's a big part of what we've been talking about thinking it might have fallen into fourth quarter, but now it’s dropped into first quarter 2019 getting us off to a good start, at least as an announcement.

That’s great. Thank you.

There are no further questions at this time.

Well, since we don’t have any more questions, I’d like to wrap up by thanking everybody for joining the call. And this concludes our fourth quarter and full-year 2018 conference call. Have a great Valentine's Day.

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