Jack Jurkoshek - Director of Investor Relations M. Kevin McEvoy - Chief Executive Officer, President and Director Marvin J. Migura - Executive Vice President W. Cardon Gerner - Chief Financial Officer, Chief Accounting Officer and Senior Vice President.

James Knowlton Wicklund - Crédit Suisse AG, Research Division Jonathan Donnel - Howard Weil Incorporated, Research Division Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division Kurt Hallead - RBC Capital Markets, LLC, Research Division Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division Daniel R.

Leben - Robert W. Baird & Co. Incorporated, Research Division Ian Macpherson - Simmons & Company International, Research Division Brad Handler - Jefferies LLC, Research Division Darren Gacicia - Guggenheim Securities, LLC, Research Division Michael R. Marino - Stephens Inc., Research Division.

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2014 Q2 earnings conference call. [Operator Instructions] Thank you. Jack Jurkoshek, you may begin your conference..

Good morning, everybody. We'd like to thank you for joining us on our 2014 second quarter earnings conference call. As usual, a webcast of this event is being made available through the StreetEvents Network service by Thomson Reuters.

Joining me today are Kevin McEvoy, our President and Chief Executive Officer, who will be leading the call; Marvin Migura, our Executive Vice President; and Cardon Gerner, our Senior Vice President, Chief Financial Officer.

Just as a reminder, the remarks we make during the course of the 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'm now going to turn the call over to Kevin..

Good morning, and thanks for joining the call. I'm pleased to be here with you today to discuss our 2014 second quarter earnings results. Our record quarterly EPS of $1.02 was slightly above our guidance and was up 21% over the first quarter of this year, and up 12% compared to the second quarter of 2013.

Year-over-year quarterly EPS increased on profit improvements by Subsea Products, ROVs and Subsea Projects. Sequentially, quarterly EPS rose on higher operating income, principally from Subsea Products and Subsea Projects.

We achieved record quarterly operating income from Subsea Products, which was up 23% over the previous record set just 2 quarters ago in the fourth quarter of 2013. And for the first time, quarterly profit from Subsea Products exceeded that of ROVs. Our outlook for the second half of this year remains positive and unchanged overall from last quarter.

We still believe we will achieve record results for the year and are narrowing our 2014 EPS guidance to a range of $3.95 to $4.05 from $3.90 to $4.10. Compared to 2013, we continue to forecast income growth for all of our oilfield operating segments in 2014.

Compared to the first half of 2014, we expect to generate higher income during the second half from each of our operating segments, led by ROVs and Subsea Projects.

ROV profits are expected to be up on an increase in days on hire and a slightly higher operating margin as we benefit from the additional days worked, a favorable change in geographic mix to more work off Africa and the Gulf of Mexico and improved execution on our new ROV startup operations.

For Subsea Projects, we are forecasting a higher contribution, primarily from our deep water vessel service and diving operations in the U.S. Gulf of Mexico. We also anticipate that Advanced Technologies will have considerably better results during the second half of 2014 due to expected better job execution and increased activity on work for the U.S.

Navy and theme park activity. For 2014, we anticipate generating at least $855 million of EBITDA. Our balance sheet and projected cash flow provide us ample resources to continue to invest in Oceaneering's growth, and we intend to do so.

Our focus in 2014 continues to be on earnings growth and investment opportunities, both organically and through acquisitions. I'd now like to review our second quarter segment results. Year-over-year second quarter Subsea Products' operating income improved 28% on a 27% increase in revenue due to a higher demand for all of our major product lines.

Operating margin was flat. Sequentially, operating income rose 46% on the strength of higher revenue and increased profitability from fueling and Subsea Hardware, resulting in a 3% increase in operating margin. Our Subsea Products backlog in quarter end was $850 million compared to our March backlog of $894 million and $902 million 1 year ago.

During the quarter, we announced one large umbilical contract for offshore Indonesia. Year-over-year and sequentially, the backlog decline was primarily attributable to umbilicals, the market for which, we continue to note, can be quite lumpy. Year-to-date, our Subsea Products operating margin has been 23%.

And given our outlook for the second half of 2014, we are now forecasting that Subsea Products' operating margin for the year will likely be around 21%, the high end of our previous guidance range. Now turning to ROVs. Year-over-year, ROV operating income improved on higher demand to provide drill support and vessel-based services.

Our ROV days on hire increased 10% to approximately 24,500 days. Sequentially, operating income was essentially flat as operating margins declined due to higher repair and maintenance expenses, unanticipated costs associated with placing new systems in service, and slightly lower fleet utilization.

Revenue grew on increases in days on hire and revenue per day on hire. Our fleet utilization during the quarter was 84% compared to 86% sequentially, and 83% in the second quarter of 2013. Year-to-date, our fleet utilization has been 85%.

And we are now projecting that our fleet utilization for the year will be around 84%, which takes into consideration our exposure on floating rigs rolling off contract during the remainder of this year. We still expect to achieve record ROV segment operating income for the 11th consecutive year.

Operating margin during the quarter was 28% compared to 30% in the first quarter, and 29% a year ago. During the second half of this year, we should benefit from an increase in days on hire with a favorable geographic mix to more work off Africa and in the Gulf of Mexico.

Compared to the second quarter, we anticipate quarterly operating margin will be slightly higher in the third and fourth quarters. During the quarter, we put 13 new ROVs into service and retired 4, for a net addition of 9 systems. At the end of June, we had 323 systems available for operations, up from 296 a year ago.

9 of the new ROVs went into vessel support service and 4 into drill support. At the end of the quarter, we had ROVs on 170, or 60%, of the 284 floating rigs under contract. Sequentially, the contracted rig count increased by 1, and the number of rigs we had ROVs on increased by 3.

Year-over-year, the contracted rig count increased by 7, and the number of rigs we had ROVs on increased by 10. Our fleet mix during the quarter was 71% in drill support and 29% on vessel-based work. This compares to a 72-28 mix last quarter and a 73-27 mix in the second quarter of 2013.

During the second half of this year, we expect to place at least 13 new ROVs into service; and we have contracts for all of these. When these new vehicles are placed into service depends upon the actual commencement dates of each new drilling rig and vessel project work.

On a gross basis, we now anticipate adding 40 or more new systems to our ROV fleet in 2014. Looking at Subsea Projects. Segment operating income was higher year-over-year as a result of adding the Bourbon Evolution 803 to our Field Support Vessels Services contract with BP offshore Angola and the Normand Flower to our U.S. Gulf of Mexico fleet.

The increase from operating these 2 vessels was partially offset by the fact that last year's second quarter results benefited from a subsea well stimulation service project offshore Ghana, utilizing a customer-provided vessel.

Sequentially, Subsea Projects' operating income increased largely as a result of adding the Bourbon Evolution 803 and a higher profit contribution from the Ocean Alliance in the U.S. Gulf of Mexico. The Ocean Alliance was out of service for much of the first quarter, undergoing a regulatory drydock inspection.

Our overall Gulf of Mexico results did not seasonally improve as we benefited from Subsea Hardware installation work during the first quarter of 2014, which was an unusual occurrence for that time of year. We have not yet received an official contract extension from BP on our Field Support Vessel Services contract.

Discussions to extend this contract should conclude during August, and we continue to expect a favorable outcome. As for our remaining business operations for the second quarter, Asset Integrity operating income declined year-over-year on a lower level of work in Africa.

Sequentially, operating income improved slightly due to a seasonal increase in activity in Europe and the Caspian Sea area. Advanced Technologies' operating income was lower, both sequentially and year-over-year.

Sequentially, the decline was attributable to execution issues, including slow progress on scheduled navy submarine work and industrial project engineering design problems that caused increased costs associated with rework and schedule delays.

In addition to these execution issues, the decline year-over-year was attributable to decreased activity on theme park projects, the U.S. Navy submarine repairs and engineering services. Furthermore, operating income in the second quarter of 2013 included an incentive bonus from meeting theme park schedule completion dates.

In summary, our second quarter results were slightly above our expectations, and we were pleased with our cash flow generation of $217 million of EBITDA during the quarter.

Capital expenditures for the quarter totaled about $157 million, of which $60 million was invested in ROVs; $29 million was spent on Subsea Projects; $26 million on Subsea Products; and $40 million in the announced acquisitions of AIRSIS, to enhance the asset tracking service we offer on offshore drilling rigs and vessels engaged in subsea activities; and Spectrum Sales & Service, to add subsea pipeline inspection capability based on the use of Electromagnetic Acoustic Transducer technology.

AIRSIS' financial results are included in our Subsea Projects segment and Spectrum's in our Asset Integrity segment. Moving on to our third quarter outlook. We are projecting EPS in the range of $1.10 to $1.15. Sequentially, we anticipate quarterly income improvements from all of our operating segments, led by ROVs.

We are also expecting year-over-year third quarter profit increases for each of our business operations, led by Subsea Products. On a macro basis, we remain convinced that our strategy to focus on providing services and products to facilitate deepwater exploration and production remains sound.

We believe the oil and gas industry will continue its investment in deepwater as it remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates at relatively low finding and development costs.

We anticipate that demand for our deepwater services and products will continue to rise and believe our business prospects for the next several years remain promising. At the end of June 2014, 119 of the 165 existing high spec drillships and 56 generation semis were contracted to operators other than Petrobras in Brazil.

We had ROV contracts on 95 of these for a market share of 80%. There were a total of 97 new floating rigs on order. And we expect 68 of these will go to work for operators other than Petrobras in Brazil. Of these, 21 ROV contracts have been led, and we have won 19 of them.

42 of the remaining 47 contracting opportunities do not have announced drilling contracts. Looking forward, we see no reason why we will not continue to be the dominant provider of ROV services on high spec rigs working for operators other than Petrobras in Brazil.

We are, however, anticipating that some of these new rigs will likely be used to displace existing, less technically capable rigs, and that this will partially offset the gains we achieve on the newer rigs. The outlook for floating rigs demand in the U.S. Gulf of Mexico remains encouraging.

There were 49 rigs under contract in this area at the end of the second quarter, up 9 from a year ago and up 1 from last quarter. We had the ROV work on 43 of them. Furthermore, there are 5 additional floaters scheduled to commence working in the area during the rest of the year, and we have the ROV work on all of them.

So even with the possible release of some of the rigs currently under contract, there should be a good level of rig activity for the balance of this year. At the end of 2013, there were more than 500 discoveries in deepwater that have not yet been developed.

We expect that many of these will eventually be put into production, and consequently, it is likely that orders for Subsea Hardware will grow to levels not previously experienced. And demand for ROVs to support vessel-based activities should follow.

Quest Offshore's latest Subsea Hardware forecast for the period 2014 to '18 includes an increase in tree orders of about 55% and a 44% increase in umbilical orders over the previous 5 years.

While subsea tree orders are a leading indicator of future field development activity, it is subsea tree installations and trees in service outside of Brazil that matter most to Oceaneering.

Based on their subsea tree order forecast, Quest Offshore is projecting average annual subsea tree installations of 365 outside of Brazil over the 5-year period 2014 through 2018, an increase of approximately 60% over the previous 5 years.

The number of subsea completions in service compared to 2013 is projected to increase by around 1,000 trees, more than 30% by the end of 2018, in spite of the fact that about 800 wells are forecast to be removed from service.

The projected rise in tree installations and the growing number of subsea completions in service should lead to umbilical and connection hardware sales, demand for IWOCS services and vessel-based ROV and tooling demand.

Furthermore, industry and regulatory emphasis on safe and reliable operations is providing additional opportunities for us to demonstrate our capabilities. We are well positioned to supply a wide range of the services and products required to safely support the deepwater efforts of our customers.

We believe Oceaneering's business prospects for the long term remain promising. Our commanding, competitive position, technology leadership, and strong balance sheet and cash flow enable us to continue to grow the company, and we intend to do so. In conclusion, we are anticipating that we will achieve another record year of EPS performance in 2014.

We appreciate everyone's interest in Oceaneering. I will now be happy to take any questions you may have..

[Operator Instructions] Your first question comes from the line of Jim Wicklund of Crédit Suisse..

Subsea Products is rocking and rolling. When we came down to the tooling Analyst Day, it was exceptionally impressive. There are a number of pieces that we saw that you're going to add to that provides significant growth rates.

Is ROV going to -- income going to be eclipsed permanently by the Subsea Products business?.

Did you say permanently, Jim?.

Well, you know, I mean, if -- they beat you this quarter, and ROV is going to grow. But this thing's growing a whole lot faster, it would seem. I'm just wondering how big this thing can get..

It can get pretty big. I would not extrapolate 1 quarter into the full year. I think with the number of ROVs that we are adding and the contribution they are making, they are still going to remain dominant for a while longer..

Okay, okay. That's still not a bad up-and-comer though..

No. We think it's great to have something else working on our behalf..

Absolutely. If they don't like the short heavy guy, at least you got big feet. In the ROV business, you are adding more ROVs net this year than had previously been expected. Is that market opportunity? Is that just accelerating growth because you've got the capital? I mean, I realize that you have a dominant market share anyway.

But what's driving that?.

Well, first of all, Jim, I think we intentionally said that we're adding 40 gross systems to the fleet..

Oops, I'm sorry. I didn't mean to say that. 40 gross, right..

Right. And so, I mean, it remains to be seen, a, how many we end up retiring between now and the rest of the year which they will play out over the next 2 quarters, and we record those at the quarter end.

I think the question a lot of people are grappling with is why, if utilization is falling, are we adding new vehicles? And I think the answer to that is pretty clear. It's when the customer demands new vehicles to go on new rigs or vessels being -- that we get contracts on. We're doing that to meet customer demand.

And we've always taken a look at our idle fleet and retiring those that are not market-ready or cannot be made market-ready in an economic way. So I think the fact that we are increasing our gross adds was a pleasant -- a positive news from the ROV group. I mean that they think the market continues to grow.

And yet the big question is, how many of these new rigs that could be placed into service in the second half of the year are going to be replacing old rigs already in service that we are on? But just as a data point, I wouldn't extrapolate that either.

But it is good to know that the net working fleet increased by 1, and our ROVs and drill support increased by 3..

I agree. I think that's impressive. Increased demand is always a good thing. Last question, if I could.

In terms of tooling and subsea products, what's your best, most popular product these days?.

That's like looking at a Chinese menu and asking which one is the most popular..

Well, I'm not asking for the revenues of it. I know you won't answer that.

But I'm just wondering, what subsegment -- what use, what particular service is most in demand these days?.

I mean, I think, general ROV interface drilling still is the bulk of what we do. The things that have the most leverage are the specialty subsea work system tools, some of which you saw at that Analyst Day presentation. But you can't predict something that clients aren't even planning for because they don't know about it until it breaks.

So it makes it really hard to do a trend line of something like that. But having that capability is very, very important and powerful to us. We noted the Ghana job offshore that gave us a nice bump in the quarter that happened, and I mean, that's the kind of leverage you get. But they're just kind of one-off projects, is the only thing about it.

Rather have them than not..

Your next question comes from the line of Jon Donnel of Howard Weil..

If we could drill down a little bit more on that ROV question in terms of the incremental demand that you guys are seeing. Is there a call -- the original plans for the ROV additions were based off of contracted. And it sounds like the rest of the ones that you have for the remainder of the year are also under contract.

Can you give us a breakdown of, you -- compared to your original expectations, how many of those new contracts are for drill support work versus vessel-based work?.

Not really, no. I mean, when we had the list of opportunities, Jon, they got us to 30 to 35. And now, they get us to approximately 40. I mean, there's just so much movement in there and assumptions as to probability of when. I mean, when we pick 30 to 35, yes, we had a lot contracted, but we had also quite a few on spec.

And some of those have firmed up; some of those went to others. So no, I can't give you a split between why we're adding more growth than we originally expected because of increased demand. What we do know is that the mix has changed towards more vessels, because of the 13 that we added, 9 of them went on vessel support and 4 went to ROVs..

Okay. I guess I was just -- I was trying to get, maybe -- it seems like there's certainly the perception that the drilling market is slackening here. Yet you continue to add more vessels than certainly more than what we're seeing in rig additions.

I guess, another way of asking that is, when you've had the more drill support ROV additions compared to overall rig count add, has that been typical for you guys in the past, too? Or is this -- has that rate slowed down or sped up here, as we think about the numbers you put up for the first couple of quarters?.

Well, I think the new market dilemma that we're facing is the replacement of rigs. I mean, rigs going idle. It used to be if you won 80% of the rigs coming out of the yard, you would win 80% of the incremental rigs working.

Today, if you win 100% of the -- this quarter, for example, we won 100% of the rigs being placed into service, and we went up a net of 2 because 2 went away. So the only thing the math works is 5 rigs went idle. And -- make sure I get this right, we added 3 ROVs net. And the....

Fleet added 1..

And the fleet added 1. So 3 went in and 1 went -- 4 went out..

2 went out. 2 went out....

Sorry. The new rigs coming in, Jon, are pretty visible, we know what those are. The old rigs going out we don't really know. And vessels, usually, we don't have very good line of sight too.

And so, those would tend to be more of the variable in there, apart from a rig that we might displace someone else on, that, obviously, you don't predict that too far in advance..

Yes, I appreciate that. And it just seems like you -- the drill support side of business, seems to be holding up better than what the perception of the market is out there. And it just doesn't seem like you're getting credit for that.

But as I think about the Subsea Products, which are topics here, can you give us any help on maybe geographies that were driving the big uptick in tooling? Was it still mostly Gulf of Mexico-related, or are you branching out into other markets there as well?.

I think Norway has been very good to us this year. Gulf of Mexico is pretty steady, and West Africa. I mean, those really are the primary places..

Your next question comes from the line of Byron Pope of Tudor, Pickering, Holt & Company..

When you framed the ROV business in terms of Q3, you talked about favorable mix toward Gulf of Mexico and Africa. You guys have also the decent presence in the North Sea. So I'm just curious how you're thinking about -- or you just touched on it, the market, Norwegian market being healthy in terms of the Subsea Products side.

But just curious as to how you see the outlook on the Norwegian side for your ROV business and maybe for Asset Integrity as well..

I would say, for Asset Integrity, it would remain fairly steady. The ROV side, we've got about as many ROVs working there as we do in the Gulf of Mexico and West Africa. That looks to be pretty steady as well..

Okay. And then, for Subsea Products, I couldn't write fast enough. But I just -- I thought I heard you say with regards to the full year, Subsea Products, were you guiding to 21% up margins? I wasn't clear on exactly on what you guys are referring to there..

Yes, the operating income margin for that business..

Okay.

And so, in the back half of the year, is that just a function of some of the umbilical projects that you guys have won starting to flow through, that's bringing down that full-year margin expectation?.

Well, I mean, that percentage, that margin is always a result of the product mix that we have. Umbilicals we can see, you can't always see what's coming on the tooling and IWOCS and some of those higher-margin parts of the business. So we've had a good data point and we feel good enough about it to go to the upper end of the margin range.

But we don't have enough visibility of the higher-margin mix that could come to make a declaration on that for the second half..

And I think the good news is we have significantly increased our throughput in umbilicals and yet we are posting -- we expected when we said when that was going to happen, when we expected that to happen. We said we would have margins in the high teens. And we've been able to do numbers better than that.

And -- but I still think it's product mix, as Kevin said, that makes it -- and we just had a very good second quarter. And it affects our year-to-date, and we don't think we're going to have 2 more of those in the second half..

Understood. And then, last question for me. It's been a while since we've had an active Gulf of Mexico hurricane season. I know some of your businesses actually benefit from it.

So could you just frame at a high level during hurricane season the typical impacts, if we had activity disruptions for the ROV side of your business, as well as for Subsea Projects?.

Well, during hurricane, everybody comes to the beach. So everything kind of stops. And so, that negatively impacts, certainly, all the vessel-based businesses -- business work. And depending on the path and the size of the hurricane and the rest of it, when they start evacuating drilling rigs and whatnot with personnel, then that affects us as well.

I think our view on hurricanes is that, overall, it's more negative than it is positive. And the only positive thing that would come out of it was to be if there was a lot work to be done due to damage on shallower water structures and flow lines and whatnot.

And I don't know, my personal view of it is that probably most of what was going to fall down already fell down. And you would not see a repeat of the amount of damage that occurred back in 2005, '06, '07..

Yes. I mean, those were very unusual years with a number of major storms. And the amount of damage that was done and number of downed platforms that caused an incredible spike in work..

And mostly, all of our stuff, and I think since then operators have taken out platforms that were -- that they didn't deem to be strong enough to withstand a similar type of event in the future. Or they beefed them up so that they could..

Your next question comes from the line of Kurt Hallead of RBC Capital Markets..

Just had a couple questions. First, again, just going to beat the ROV horse to the ground here. But -- so of the -- when you think about the potential of rigs being displaced throughout the course of the year, and I'm sure you have taken -- you've gone through your own assessment.

So I was wondering if you might want to share your views on what you do think could be displaced, new rigs vis-a-vis old rigs as the year goes on..

I'll give you my model, okay, Kurt? And then, it is a guess and an assumption. And it's what we said. It is how we base our forecast. It is just how it impacts us. We have 39 ROVs on 33 rigs that according to IHS Petrodata have contracts expiring in the second half of 2014. And their average remaining contract term is around 100 days.

And of course, the exposure's weighted more to the fourth quarter than in the third. What we have assumed is that, essentially, 18 rigs will continue to work through the end of the year, and 15 will be sacked. So based on this assumption, we forecasted these 39 rigs will be on day rate for approximately 55% of the uncontracted exposure on these rigs.

So that frames how it affects our drill support. How accurate those assumptions are? It does include that no contract will be terminated before its Petrodata database says is going to expire, and then we had to make a number. And we did it based on our assessment of rigs, the customer information and rig operator conversations..

That's great, that's fantastic color. I really appreciate that. The next follow-on question, as it relates to ROVs is, I know, over time, ROV pricing is not a significant make-or-break decision for an operator, especially vis-à-vis the rig rates. I think we are all aware of the pressure on the ultra deepwater rig rates that has and continues to occur.

Any inkling on your part? Any pushback from customers, whatsoever? Even at the margin, as it relates to what you guys are asking for on ROV pricing?.

Actually, there's really been no change in that regard from prior recent quarters. I mean, as we continue to say, we did on every job, we do have competition trying to get these jobs away from us, usually at some discount. And we are successful 80% of the time. And it is difficult to raise rates, per se.

And we have still managed to raise them enough in the face of the increasing labor costs. And in some cases, increasing CapEx costs for deepwater systems to largely maintain our same margin, and that fight just continues on like that, and I expect that it will, going forward, for as far as I can see right now anyway..

And I think it's important for everyone to remember that our average revenue per day on hire also is influenced by the mix between vessel work and drill support. So sometimes you might see a change in mix, and it might be interpreted as a price increase or price decrease, and all it is, is the change in the number of crew..

Got it. Appreciate that. Now one last, if I may, on the Subsea Products side. You guys continued to provide the very positive macro data, 500 discoveries not yet developed. And again, I just want to make sure I understand the driving dynamics here when investors and ourselves think about the offshore products business.

It is really being driven by those discoveries not yet developed. The way that I've, kind of, always thought about it is, the installation, repair, maintenance on subsea infrastructure. It's not -- that's not directly tied to rig rates or so on and so forth. So I'm just looking for some additional clarity on that.

I think there's some concern in the marketplace that what's going on in the rig market directly impacts what the subsea infrastructure is going to be. So if you could provide some clarity on that, that would be great..

Sure, I think that once there is an identified development, I mean, that is going to go forward in some sort of priority of return versus capital for each operator. But those things are going to go forward. And what's happening in the rig market, per se, I don't think is really overly relevant.

I mean, I think that is really going to affect how much more exploration folks are doing at that time. And certainly, once you get to a decision to go ahead on producing the field, all the other stuff happens. They order all the hardware and the equipment, and the installation happens, and then the whole production goes.

So I don't think that the current exploration issues are affecting the 500 discoveries or projects that we think are going to eventually get done..

Your next question comes from the line of Stephen Gengaro of Sterne Agee..

Can you give us a little color, as we sort of think about the back half of the year on the Subsea Projects side? And are there any vessels that are being disrupted for any reasons? And how should we think about how the margins unfold there?.

I'm not sure I understand the question for vessels being disrupted. What do you think....

Well, just, I mean, there's a downtime in the first quarter.

Is there anything like that we need to think about in the back half of '14 or '15?.

Well, okay. The Gulf of -- I mean, the BP contract is a long-term thing. And so, I assume we're talking about the Gulf of Mexico. That is a callout business. And so, we have virtually no visibility to 2015 right now in terms of specific projects or whatnot, in terms of orders or backlog or anything like that.

So we do expect reasonable utilization for the second half of this year. But again, it's a callout business. And so, we have reasonable visibility for Q3. And it starts to fade off a little bit when you get into certainly the mid-back part of Q4, and also weather will tend to play some factor in that depending on what that is at the time..

Okay. And then, as we think, just....

Stephen, Steve, generally, I mean, if you think about the first half versus the second half, you're going to have seasonality. And we talked about the Normand evolution coming on higher. So just, generally, the second half is better than the first half in run rate and resulting in margin improvement, too. Generally..

Okay, okay. That's helpful. And on the product side, I mean, I know you're sort of reluctant to predict any kind of increase in -- or some of the higher margin work tends to be shorter term in nature.

But when you think about your guidance range for the back half of the year, is that one of the big variables that the margin profile within products? Or there's something else which moves the numbers around a bit as you look at your guidance range for the rest of this year?.

First of all, I would say with a tight guidance range, there's just not a lot of moving around. And everything is variable. Maybe it looks a lot from the outside, but it's pretty steady state. But it's -- we've got a lot of moving pieces.

And I think the range is very reasonable in Products, Projects, ROVs and Asset Integrity, and they'll all add to the variability of that mix..

Your next question comes from the line of Dan Leben of Robert W. Baird..

Great. Moving back to the ROV segment, just go ahead and try bury the horse, I guess. On an intermediate term, looking out with the amount of installations in place, as that continues to grow.

Does this business naturally have to shift more towards more of a vessel-based than what it has been historically?.

Over time, I think we would expect the vessel percentage of the total to increase. But I don't think this is any sharp increase at any point in time. This will be gradual over a number of years type of deal..

Okay. And then, just a follow-up on that.

Could you just talk a little bit about some of the differences when you get in that market, either from a competitive standpoint or pricing and utilization, just how, over time, it may affect some of the metrics that we'd see?.

Well, I guess, I would explain it this way. I mean, the Gulf of Mexico, as I said earlier, is purely a callout market. It historically always has been. We have added vessels. And as we see the market demand increasing, we will certainly, seriously consider adding another vessel.

And recall that we do have one under construction that doesn't get delivered until first quarter of '16. In terms of the international aspect of that business, as we've said, we're looking for long-term field maintenance support contracts.

Long, meaning, probably at least 2 years, to make it worthwhile to go charter a vessel, if that's what the customer is looking for, and operate the vessel in a foreign location. And so, that's what we're looking for.

But I think it's pretty obvious to the marketplace that long-term field support, if you're a boat owner, a boat company, is a place where you want to play. And so, there's more competition coming into that. More people looking for that, including the more traditional construction-only kind of folks like Subsea 7 and Technip..

Great. And then, just the ROVs that would be attached to vessels. That piece of it, as well..

Well, they typically on those spreads, there are 2 ROVs because the work intensity is such that either you need 2 ROVs or you just need to have a backup. You can't afford to have the vessel not working. And the work is a lot more arduous than drill support work. So the opportunity to bang up the ROV is a lot greater. So having 2 has become the norm.

And then, you would have 2 full round-the-clock crews on those vessels and that's a good project for us..

That's a day rate and margin enhancer..

Right, yes..

Your next question comes from the line of Ian Macpherson of Simmons..

It's very easy, I think, to embrace the growth thesis for products over the long term. Shorter term, your backlog has stalled a little bit. It more than doubled from 2011 and '13, but it's down from around $900 million to $850 million.

So when we're thinking about formulating our top line growth for 2015, I think we probably need to have some visibility for backlog growth or stabilization throughout the second half of this year.

What kind of visibility do you guys have at this point for your orders in backlog for products for the rest of this year?.

Ian, we have a long list of projects that we expect -- I mean, we did involve early on the long lead time items like umbilicals and fuel development projects with feed studies and then budgetary bids and then they get refined. So we're in the pipeline early. And so, we have good visibility of the identified projects.

And every now and then, a fast turnaround project comes in, I'm talking about umbilicals and subsea field development-type of projects, not tooling and IWOCS. But we have said for so many quarters, years, that the umbilical order business is lumpy.

So it's not so steady state that we look at it and say, golly, we didn't get 1.0 kind of replacement rate and we had some backlog burned, and that doesn't foretell a demise. Or just like getting a big order, it doesn't say that increase in activity is going to continue. So I can't help you very much.

I think we were expecting our products' activity to grow year-over-year. And that's -- but we don't get too excited that it fell from $900 million to $850 million..

Okay. And then, just really getting back to Byron's earlier question on the margin. Your guidance would suggest a little bit of reversion in product margins from the first half and second half.

There is nothing to, specifically with regard to mix or seasonality, that suggests that it could drop that far, but you have perhaps some element of normal Oceaneering conservatism in that guidance based on the visibility you have today.

Is that fair?.

I would say that we see a drop in margin contribution and products for the second half. And we think it's predominantly associated with mix. And if you look, I mean, there is some seasonality into the service side, when you talk about -- Kevin mentioned that tooling was particularly strong in Norway in Q4. Norway starts to slow down.

The North Sea starts to slow down. So does the Gulf of Mexico in some spot -- I mean, some areas. So you can talk about it being normal Oceaneering conservatism, I'd see that's what in our crystal ball..

Your next question comes from the line of Brad Handler of Jefferies..

A couple of different unrelated questions, please. First, related to your -- whatever you can share on the -- on your negotiations for your vessels in Angola.

Are the contracts -- does the negotiation include keeping 3 vessels at work? Or in other words, are you rolling over 3 vessels in what you're negotiating?.

Right. I mean, the option here that is being discussed is to carry on the existing contract work that we're currently performing..

Okay. Just wanted to confirm if it was sort of steady. Second, can you give us some more color on, I guess, on the higher R&M expenses in ROVs? And I guess, if I think about it -- without precision, frankly, if I think about it over the last couple of years, maybe we've had a smattering of quarters where that feels like that sprung up.

But feel free to correct that perception. But can you comment on that a little bit? And then, or is this something that we need to think about systemically..

I don't think you should think about this in terms of systemic sort of issues. I mean, we've got 323 systems operating all across the world, basically, isolated on a drilling rig. A growing market with a lot of new trainee people coming into the mix. And we just had a collection of a couple of data points that didn't work well.

And so, it's nothing, I would say, systemic. It's just, maybe, the alignment of a couple of jobs that didn't do as well as they could have. And I wouldn't expect that going forward as a trend, or as a consistent trend, certainly..

Okay, good enough. And then, the last one, if I may. And I'm sorry, I think I'm cheating.

But the commentary about sort of new -- I think, you've sold new ROVs probably to your -- I'm guessing here, so you probably went to your potential customers for a new ROV and you said, "Well, we'll give you a new ROV," which probably makes it very difficult to turn around and say, "How about an old ROV?" I'm wondering if this current market circumstances might encourage you to think differently about the selling process.

Might you be able to proactively sell old ROVs or a more fungible kind of ROV sale, which might allow you to do that, or....

We do try that. I mean, obviously, that would be the first choice, so we do. And we have quite a, I guess, a range of age of ROVs as well. Generally, we can just put a new fish on the system, and it is like new. And so, we're able to sell that. We certainly do. And -- but maybe the situation will change.

We've got an overhang of vessels which are big but don't have any contracts at all on them. And so, maybe that dynamic will change a little bit going forward. But up until now, all the ones that we have been successful winning, the operator is taking a longer term on that unit and they want a brand-new ROV. And so, that's what we would do..

And as utilization falls, that gets a much keener focus. That exact issue that you mentioned about, selling a refurbished ROV, a light new ROV, as opposed to a new ROV to do the same work. And if contract terms are shorter terms, then the customer's focus is a little bit different too. And so, yes, we focus on that a lot. And we're focusing on it more..

Your next question comes from the line of Darren Gacicia of Guggenheim..

I'm going to avoid any horse commentary, as I go with and ask questions, I'm trying to kind of bear down on some numbers here. ROVs, you're saying you're going to add -- I'm trying to get like the difference between sort of gross and net here.

So if you say you're going to add over 40, I'm not sure if that's gross or net, you say you're going to lose 15 to contract over to the second half.

What else do we need to fill in there by way of just kind of natural ROV attrition aside from what may have happened with roles? So how do I kind of get that with kind of the net numbers on ROV adds? I heard a lot of comments, but I haven't figured out how to get there..

Okay. I think you're using data points, but may not be relevant to the fleet size. The fact that we're assuming 15 of these rigs rolling off or going to be idle for the rest of the year doesn't mean that we're taking those ROVs out of our fleet count. That has no bearing at all.

We may keep our ROVs on those rigs, unless there's another alternative, because we believe the best place for those rigs, I mean, those ROVs to go back to work is on that rig when it goes back to work. If a rig is being cold stacked, we may take an ROV off.

But what I explained is our assumption for rigs rolling off doesn't have anything to do with our fleet count. And I think the only thing you can do is we say that we're going to retire 4% to 5% on average of our ROVs per year. And so, on a base of 300, to make my math easy, since I couldn't do it a while ago, 4% of 300 is 12; 5% of 300 is 15.

And so, somewhere on a normal year, you would be expecting an average of 12 to 15 retirements. And so -- but we look at every quarter, and constantly, when ROV is idle, we look at the marketability, the cost to refurbish. And then we make a decision, do we retire it, do we refurbish it, or do we wait? And so, I can't get any more granular than that..

And so, the 84%, then, that you have as utilization guidance for the back half is basically factoring whatever the -- I'm leaving it on the rig, but it's not contracted portion of, say, the 15 you're saying for the rigs that go idle..

That 84% number we gave was for the year..

Got it. And....

Yes. I mean, the utilization includes the idle ones as does the count. If we haven't retired it, it is in our utilization count..

Got it. Last question on -- so if vessels -- I'm assuming vessel-based activity has a little bit more variance on utilization.

Does that mean kind of the average day rate per day should be creeping up to kind of offset that to some degree, as I understand the business works? Or am I thinking about that the wrong way?.

I think we said that, because of increased crew count on vessel-based ROVs, that has higher day rate associated with it. And so, if the mix changes, you also have to take into consideration the geographic area of that mix.

But directionally, if we continue to get more vessel-based days as a higher percentage of our total days, day rate should be moving up if pricing was the same..

Is there an order of magnitude to that?.

No. It really depends upon the vessel, the type of work that it's doing and no, we....

Really, it's just the addition of the extra people..

Yes..

And your next question comes from the line of Michael Marino of Stephens..

I know the Products and Projects businesses are big callout businesses. And Marvin, you touched on kind of customer conversations and planning. But I'm -- just, to be clear, I mean, there's nothing fundamental here that's changed.

And you're not -- customer conversations aren't dragging out any further than they would normally -- I mean, I'm just trying to -- one of the concerns is, maybe, rig rates is just the leading indicator and customers in general are just kind of pushing back.

But -- I mean, is anything changed in the conversations you're having?.

No. I would say, not in that regard. No. I mean, normal business is going on in outside of the exploration part of the business..

Yes. I think what Kevin alluded to earlier is, it's hard to get price increase and, I mean, at a premium to some competition. But that's been going on for some time. So I mean....

I think the discussion was more basically all the other stuff that we do, is that slowing down as a follow on to the big thing? I'd say those are not connected. At least not now..

Okay.

And I mean, so there's no reason to think that the recent trend in kind of -- especially your products business, there's no reason to think that, that can't continue out into the future?.

[indiscernible].

Okay. So Q2 was a really good quarter in Products.

Maybe you don't get back there in the back half of the year, but it's -- there was nothing exceptional about the quarter, in your view?.

Just the numbers..

Just the good mix?.

Just the good mix. And we do not think we'll get back there in the second half..

Well then, we'll have to wait till the next year if that's....

[indiscernible] Absolutely, that's right..

There are no further questions at this time, I'll turn the call back over to the presenters..

Okay. Since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. We are very pleased with our best ever quarterly results, and anticipate producing another record year of EPS for 2014. This concludes our second quarter 2014 conference call. Thanks, and have a great day..

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