Suzanne M. Spera - Oceaneering International, Inc. Roderick A. Larson - Oceaneering International, Inc. Alan R. Curtis - Oceaneering International, Inc. Marvin J. Migura - Oceaneering International, Inc..

Ian Macpherson - Simmons & Company International James Wicklund - Credit Suisse Securities (USA) LLC Sean C. Meakim - JPMorgan Securities LLC Kurt Hallead - RBC Capital Markets LLC George O’Leary - Tudor, Pickering, Holt & Co. Securities, Inc.

James West - Evercore Group LLC David Christopher Smith - Heikkinen Energy Advisors LLC Brad Handler - Jefferies LLC Scott A. Gruber - Citigroup Global Markets, Inc..

My name is Matthew, and I will be your conference operator. At this time, I would like to welcome everyone to the Oceaneering's Third 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 Suzanne Spera, Oceaneering's Director of Investor Relations..

Thank you, Matthew. Good morning. Welcome, everyone, to the Oceaneering third quarter 2018 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website. With me are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments.

Also in the room is 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 provision of the Private Security 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 third quarter press release. We welcome your questions after the prepared statement. I will now turn the call over to Rod..

Good morning. Before I begin my prepared remarks for our third quarter results, I'd like to provide an update on the impact from, and our responses to, Hurricane Michael with respect to our company's personnel and our manufacturing facility in Panama City, Florida.

Since our initial update on October 15, I'm pleased to report that all of our local employees have been located and are safe. As in the past, I'm amazed at how our family of employees have come together to help each other, as well as others in the Panama City community during the aftermath of this devastating storm.

We continue to work with the impacted employees and the local community through the recovery process. In addition, significant progress has been made in the cleanup and repair of our facility. Debris removal is under way and power has been restored.

Major equipment and machinery is being tested to ensure that there is no damage, and contractors are on site making roof, siding, and structural repairs. Our ability to respond so quickly was made possible because of the commitment and the collaborative efforts of our employees.

We're also grateful to the Port of Panama City and numerous vendors and customers who have gone the extra mile to provide support. To each of these individuals and their families, I'd like to say thank you. Now back to our quarterly results. I'll start with a review of our third quarter.

Next, I'll provide the outlook for fourth quarter and the full year of 2018, followed by a brief overview of 2019. After my closing remarks, we'll open the call for Q&A. Looking at our third quarter 2018 financial results.

We are pleased that each of our operating segments were profitable, and on a consolidated basis, we generated adjusted EBITDA of $47.2 million, which was slightly better than consensus. Our consolidated third quarter 2018 operating results met our expectations.

However, from a segment perspective, these results were not achieved in the manner initially anticipated. Excluding certain tax adjustments and after-tax effects of the gain from the sale of an investment and foreign currency exchange losses, our adjusted net loss per share was minus $0.14.

Compared to our adjusted second quarter results, operating results for the third quarter improved by $10.4 million, mainly due to favorable profit contributions from subsea projects and subsea products and lower unallocated expenses, partially offset by lower profitability by our ROVs.

Now let's look at our business segments by segment for the third quarter compared to our prior guidance, and the second quarter.

Operationally, for the third quarter 2018 ROV days on hire increased 4% to approximately 14,250 days, largely on increased demand to provide vessel-based services, as our fleet utilization improved to 56% from 54% last quarter.

Our fleet use mix during the quarter was 59% in drill support and 41% in vessel-based activity, compared to 62% and 38% for the prior quarter. Average ROV revenue per day on hire was lower, as expected, declining 6% sequentially, due to a shift in our geographic mix of ROVs to lower day rate operating areas, notably Europe and Brazil.

ROV operating income declined more than expected due to operational inefficiencies associated with the reactivation of equipment and crews. This phenomenon results from the current short-term contracting environment we are in, as rig and vessel activity levels increase.

In this type of market, our operating efficiencies are stressed as different ROVs work with different rigs or vessels performing short-term contracts. While these reactivation costs, or the costs to mobilize and demobilize are usually not significant in terms of dollars, they do impact our margins in the current low rate environment.

Consequently, ROV EBITDA margin declined to 27% from the approximately 30% that was expected. During the quarter, our drill support market share improved slightly to 61%, with ROVs on 91 of the 150 floating rigs under contract at the end of September.

This compares to having 60% drill support market share with ROVs on 92 of the 154 floating rigs contracted at the end of June. Our fleet size remained unchanged at 279 work-class vehicles. Turning to Subsea Products. As mentioned before, operating income during the third quarter 2018 was better than expected on a 13% increase in quarterly revenues.

The improved operating results were due to increased throughput in our manufactured product businesses. During the third quarter 2018, the revenue split between manufactured products and service and rentals as a percentage of our total Subsea Products revenues was 54% and 46%, compared to the 50%/50% split during the second quarter of 2018.

Our Subsea Products backlog at September 30, 2018, was $333 million, compared to our June 30, 2018, backlog of $245 million. The backlog improvement was largely attributable to an increase in order intake for our service and rental business offerings. Our book-to-bill ratio year-to-date was 1.2 and the past 12 months has been 1.1.

Sequentially, Subsea Projects achieved a return to profitability, as expected, and generated $6.1 million of operating income during the third quarter 2018 on a 35% increase in quarterly revenues. These results were mainly driven by higher levels of seasonal utilization and pricing in U.S.

Gulf of Mexico deepwater vessel and diving services and an increase in survey services. Ecosse results were lower than projected due to equipment modifications and field trials that delayed execution. For Asset Integrity, operating income was down due to delays in anticipated project awards by customers.

For our non-energy segment, Advanced Technologies, third quarter operating income was slightly better than expected due to increased project throughput in our commercial theme park unit.

Unallocated expenses for the third quarter 2018 were lower than the second quarter 2018, as performance-based compensation expenses were reduced based on our expected level of results relative to the respective planned targets. Our third quarter 2018 tax provision of $61.1 million included $56.5 million of discrete tax items.

The provision for discrete items should have minimal cash tax implications for the foreseeable future. During the nine months ended September 30, 2018, our cash taxes paid totaled $25.8 million, as compared to $30 million paid during the same period 2017.

At the end of the third quarter, we had $367 million in cash and an undrawn $500 million unsecured revolving credit facility and no near-term loan maturities. Now let me address our outlook for the fourth quarter of 2018.

We believe our results will be lower than our adjusted third quarter results due to the onset of seasonality, leading to reduced levels of offshore energy activity. Sequentially, we expect lower operating results from each of our energy segments with most of the decline expected to be in Subsea Products and the Subsea Projects segments.

For our non-energy segment, Advanced Technologies, we are projecting a quarterly improvement in operating income. Unallocated expenses are expected to be in the upper $20 million range.

By segment, for our ROV segment, we are expecting an operating loss due to fewer days utilization, largely on decreased seasonal demand to provide vessel-based services and lower average revenue per day on hire. Our forecast assumes our overall ROV fleet utilization for the quarter to be in the low 50% range.

Based on our anticipated levels of utilization, combined with our fleet mix expectations, worldwide locations for which ROVs may work and cost structure, we expect our EBITDA margins to be in the high 20% range. We expect to slightly increase our ROV market share for drill support services.

At the end of September, there were approximately 27 floating drilling rigs that have contract terms expiring during the fourth quarter and we have 19 ROVs on 16 of them, or 59%. Of the 27 floaters, 5 are rolling to new contracts. There are 22 additional floating rigs set to begin new contracts during this same period.

Of the total 27 floaters that have received new contracts, we have 27 ROVs on 21 of them, or 78%. In addition, we expect there will be some incremental contracting of rigs based on current bid activity. For Subsea Products, we are expecting an operating loss on relatively flat revenue.

This decline in performance is primarily due to substantially lower levels of production at our manufacturing facility in Panama City, Florida, due to damage caused by Hurricane Michael in mid-October 2018.

We still expect an increase in contract awards during the remainder of 2018, which should keep our book-to-bill ratio above 1.0 for the full year. For Subsea Projects, we expect lower operating income on reduced revenue, due to the seasonal decrease in U.S.

Gulf of Mexico deepwater vessel and diving work, and survey services, offset slightly by increased contributions from Ecosse. With respect to the Ocean Evolution, we continue to work with the builder to complete the remaining punch-list items and still expect the vessel to be delivered late 2018.

For Asset Integrity, we expect our operating income in the fourth quarter to be lower due to seasonal decreases and expect margins to be in the low single-digit range.

For our non-energy segment, Advanced Technologies, we expect operating income to improve, driven from backlog in our commercial theme park business and improved results within our automated guided vehicle business. Unallocated expenses are expected to be within our prior guidance of the upper $20 million range per quarter.

For the full year of 2018, we currently expect our adjusted EBITDA to be in the lower half of the guidance range of $140 million to $160 million, with each of our operating segments contributing positive EBITDA. Our total organic capital expenditure for the year should be in the range of $100 million to $140 million.

This includes approximately $40 million to $50 million of maintenance capital expenditures and $60 million to $90 million of growth capital expenditures.

Looking forward to 2019, and in closing, we remain encouraged that the long-term fundamentals for the offshore energy industry have stabilized, and we believe we are now in the early stages of a recovery in industry activity and in our businesses.

Accordingly, looking into 2019, we are projecting increased activity levels in each of our segments, likely led by revenue gains in our Subsea Products manufacturing business unit. However, the pace of recovery is still difficult to determine and, at this time, we are not prepared to offer more detailed guidance on 2019.

Overall, we expect a recovery will take time, and only after a sustained higher level of activity can prices for our services and products be increased enough to generate satisfactory returns. We appreciate everyone's continued interest in Oceaneering and we'll now be happy to take any questions you may have..

Our first question comes from the line of the Ian Macpherson with Simmons. Your line is open..

Hey. Thanks. Good morning..

Morning, Ian..

Rod, we've had this sort of oscillating working rig count. Last quarter, there was a positive story with the increase in working floaters from, I think, it was 104 to 120 or thereabouts. And it's come back down a bit here in the fourth quarter.

And I wonder when you look towards improving activity levels for 2019, what your customer visibility is for the slope of recovery? And I guess it's not all a rig count business.

You have your vessel-based activity and all the rest, installation and IRM, but what are you hearing from customers with regard to their anticipated slope of activity looking out to next year with better oil prices?.

I don't think we're hearing anything that would contradict what we're getting back from what's on the street right now. I mean, I think that people think that it's maybe 5% to 8% increase in working units. I've heard numbers as high as 10%. But we're kind of in that – we're in that range as well.

And we're pretty confident that, given sort of the bid activity, there's meaningful – or there's something behind that. It's not just talk..

Right. Thanks. And then, there is a modeling curiosity. The updated guidance has reduced depreciation for this year that looks like it will significantly reduce the run rate coming out of Q4.

Can you speak to what drove that and what segment that is and why, Alan?.

Depreciation going into 2019?.

Well, I think you lowered your 2018 depreciation a good bit. It looks like it's all falling into Q4..

Oh, from the $215 million to the $208 million?.

Yeah..

That was really just getting a better normalized rate. We had some unique items in the first half of the year that went into that calculation. So we just went back in at this point in time, we were rounding to the $5 million range, originally. And at that point in time, our estimate rounded up to $220 million – or $215 million.

And this time, if we'd round it to the $5 millions, it just was going to give an incorrect answer, we felt. So....

Accelerated, yeah..

Understood. So it's not event specific or segment specific. Okay..

No it's....

Got it. Okay. I'll pass it over and re-queue if necessary. Thanks..

Yeah..

Thanks, Ian..

Our next question comes from the line of James Wicklund with Credit Suisse. Your line is open..

Good morning, guys..

Morning, Jim..

Rod, you gave a good outlook on the core businesses. I know that you have made some acquisitions. And you've got a team working on renewables right now. It's really a two-part question. Can you catch us up with the business you're doing in renewables? And you've got a clean balance sheet.

And this seems like an opportunistic time for companies – we've seen it in the offshore and the onshore business – to start consolidating some of the opportunities out there.

Can you talk about any additional M&A you might do? And can you catch us up on your renewable business, please?.

Sure. So I'll start with the renewables part. We did pick up the Ecosse acquisition. And that's still really exciting, because it brings us a little closer to the operators out there. I've shared this story before, but it probably bears repeating.

I think a lot of the people in the renewables industry were a little suspicious of oilfield operators, and they kind of believed that we would move over there, we'd do some work. And then as soon as the commodity price picked up, we'd go back to doing what we're used to.

Our investment there, I think, has really given us a better lasting relationship with the operators in the renewables business. So that's been good. And because really, when we think about the impact of that business on Oceaneering, the Ecosse part is great.

But our ability to provide communications, tooling, ROVs, survey services, and other things, I mean, that is actually a larger impact in the business is just having better access to that market. We're hoping that as that grows and goes outside of, say, that primary focus that's in the North Sea, that coming to the U.S.

is going to be a great opportunity for us and also other places around the world. So it looks really exciting. Obviously it takes a while for that to get as big as the offshore energy – or the oil and gas part of the energy industry. So stay tuned..

You have to start growing a stool leg at some point. That's all right..

That's right. And you want to be early. So the other part as far as M&A goes, I think you're really talking about, we're staying where we were before as far as, we're very interested in the things that are in our wheelhouse that give us greater exposure to OpEx.

And that continuing streams of revenue, gets us away from some of the volatility of the drilling rigs or at least offsets that. But it's still got to be something that we're good at and makes sense and has good industrial logic. I think fortifying some of the other things around the renewables, that's always been in our growth propeller chart.

And other things around Asset Integrity and automation and the light well intervention, those are all still in the cards..

My follow-up, if I could. So far, the offshore pickup has primarily been shallow water. People start spending money offshore, that's positive for you guys, period.

But can you talk a little bit about the different opportunity, bottom line impact, if you would, between if the shallow water continues up through 2018 and 2019, and deepwater doesn't happen till 2020, can you kind of walk us through what the impact of that would be on the business?.

I mean, it – obviously, we want more of the deepwater business that gets the ROVs rolling, gets the drilling rigs going, more product sales. But in the shallow water, we continue to participate on the diving side. We're doing IMR work and we're still supporting some of that on the shallow water as well. So we'll hang in there and keep working.

But it's just hard to say that there's a real recovery if it doesn't affect deepwater..

Okay, guys. Thank you very much..

Our next question comes from the line of Sean Meakim with JPMorgan. Your line is open..

Morning..

Thank you and good morning.

So thinking about the products business, looking at the fourth quarter, any risks you see or kind of puts and takes that you'd call out in terms of getting to that above 1 time book-to-bill for the full year? And just thinking about the read through of the margin outlook as we go into next year, just how that mix between manufacturing and IWOCS, how can that – how does that influence your thoughts as you'll get more information on how 2019 could shape up?.

So first of all, as far as the book-to-bill, I mean, I don't think there's any outstanding risk to fourth quarter. It's really what it always is, is that we've got these things that we bid, that we've got an expected award. And if they either delay the award or whatever, that may push into the first quarter.

But, I mean, that's really the only risk we see there. And I don't think that's meaningful or spiked out in the fourth quarter here. The mix, Sean, let me make sure. I mean, we've got two things going on. We've got sort of the relative margins between the service and rental side and the manufactured products and that products business.

And then we've also got just the mix, about how much of each we're going to do.

Can you clarify your question?.

Well, I guess it's all of the above. Just thinking about, as we exit 2018 into 2019, just in broad service, how you think those – I know it's still early and you're cautious on the overall guidance. Understood.

But just how you see those things directionally exiting the year and the setup for 2019 basically?.

Yeah. And I don't think we're prepared to give segment-level guidance at this point in time, Sean. But I think what you can read into our guidance on 2019 was we do expect it to be led by the manufactured product side of the business and largely do on the expected book-to-bill ratio that we're putting into 2018.

So we should have good backlog going into 2019. That's why we believe that business unit will lead the growth from a revenue perspective. But the same time, we've been very clear that we are meeting the market price, and it is a competitive price point. Yeah..

And I would just also add to what Alan is saying. Remember that part of the reason we've been probably speaking more about that products business into 2019 and being a little cautious on the rest is that it's got – we've got better visibility to that market. So we'll update when we know more..

Okay. That's fair enough. I appreciate that feedback.

Maybe on the ROV business, just curious how things have been shaping up here in the back half of the year in terms of callout work on the vessel side? And maybe could you just give us a sense of how you characterize pricing as trending, taking out maybe geographic considerations, but more drilling versus vessel support?.

Sure. I would say that activity – like we said, bid activity is picking up. We see that opportunity, like I mentioned in the notes, that if the contracted rolling off and rolling on works out the way we think it, it results in a net market share increase. So that part looks good.

From a pricing standpoint, if I take out regionality, we see pretty stable pricing. A few opportunities where we're incumbent or what have you, where you have an opportunity to move price in the right direction. So I would say that that's – there's no hidden bad news in the pricing either..

Yeah. But we do see average revenue per day going down in Q4 as read in the call notes there..

And that is the regional mix. So if you put that back in, that's where it's at..

Got it. Okay. Thank you for that..

Yeah. Thanks, Sean..

Our next question comes from the line of Kurt Hallead with RBC. Your line is open..

Hi. Good morning..

Morning, Kurt..

Hey. So I've heard quite a bit of conversation here over the last few months and this week about the prospective increase in FIDs, project dynamics going out into next year. I'm assuming that you are hearing and seeing that as well. Just trying to get a gauge on – I know you're not giving specific guidance on 2019, nor am I looking for it.

I just want to try to get a handle on what the – say, the operating leverage could be on the Subsea Products business at this juncture.

Is it going to be, you think, predominately driven by your manufacturing and volume throughput? Is there going to be an opportunity to get some better pricing in backlog? Just hoping you can give us some of your views on how you might see things shaking out..

Yeah. I think, Kurt, there's definitely backlog building in the products business. But I think it's – I think we're too – still too early to say that we're going to get, number one, plants getting fully loaded. And also getting to the point where everybody's plants are fully loaded to where pricing meaningfully changes.

But, hey, it's definitely going in the right direction..

Okay. So incremental margin is driven by volume for the foreseeable future. Got you. All right. And then, I heard you talk about the pricing dynamics.

And I just want to gauge, earlier in the year there were some questions about, hey, is the pricing kind of real time, and kind of what you see is what you get; or, is there any legacy contract dynamics that got to roll off? And the commentary has been, it's what you see is what you get.

Are there reasons for concern about kind of pricing trends from here, or do you think that pricing has stabilized?.

No. I think it's....

For ROV. For ROV..

Yeah. I think it's stabilized. Kurt, one of the things that we talked about a little bit, maybe it's a good chance to clarify, is from a margin standpoint, a lot of what we're looking at is this moving from rig to rig and rigs rolling off and rolling on and not being working consistently. That's hard, because operators want to change configurations.

You're moving crews from place to place. And that just isn't the most efficient way for us to operate. So, two things. Number one, we got to work on that. We got to figure out ways to be better at it, because that is a pretty persistent market dynamic at the moment.

But as it resolves, and we believe it will, that rigs work for longer sustained periods of time and contracts will eventually start to stretch out a little bit longer, then that's going to have a good effect on margins even before we see the opportunity to start moving price noticeably..

Got it. Got it. And maybe on one final one. And nice – good to know that all your employees are safe in Panama City, given the hurricane and everything else.

From a business standpoint, hurricanes tended to result in increased inspection, repair, maintenance, and increased activity with respect to Oceaneering's businesses; doesn't seem like that's necessarily been happening over the last few events.

Any thoughts as to why that – maybe that dynamic has shifted and why you're not seeing a pickup in IRM business kind of post-hurricane dynamic?.

Yeah. Well, I mean, first of all, you go back. A lot of sort of what we would call the susceptible infrastructure was taken care of in the past storm. So let's start with that. But then, also, most of the storm effect hasn't been really in the offshore areas. So we haven't seen that same phenomenon.

And I will also say that we do work in the dry for that business as well. But the same, there wasn't that much oil and gas infrastructure in the path of the storm this time around..

Yeah. Okay. All right. Thought so. Okay. Thank you..

Yeah..

Our next question comes from the line of George O'Leary with Tudor, Pickering, Holt. Your line is open..

Morning, guys..

Morning..

Just one from me, as most of my other questions have been taken by other folks. But if I think about the orders that you guys are seeing, a lot of what we see on the screen – and I appreciate why, given the size of the orders – comes on kind of the subsea side of the equation, typically, large umbilical awards.

And I was just curious, if I think back historically, I believe ROV tooling was one of the areas for your business that held accretive margins versus the rest of that manufacturing-oriented business.

So curious just what you're seeing on the ROV tooling orders and if that, in and of itself, may indicate that some -may indicate line of sight to ROVs going back to work in 2019?.

Great, George. So one of – let me say something and tell me if I'm going the right direction. But on the tooling side, that service and rental part that's inside a product, some of that is ROV tooling. But more recently in the last few years, a lot of that is driven by sort of large subsea work packages. That's our light well intervention.

That's our flow line remediation, and some of that. It includes some of the other contracts we've won on the service and rental side that we've talked about recently. So when we talk about the backlog building, yes, we've had the umbilical backlog building. We've also had a significant amount of that service and rental backlog building.

So while it's building, I wouldn't say that we can directly correlate that with ROV tooling and ROV activity. But I hope that answers the question. If not, let me know..

No, that was super helpful. Thanks. I'll pass the mic back..

Okay. Thanks, George..

Our next question comes from the line of James West with Evercore ISI. Your line is open..

Hey. Good morning, guys..

Good morning..

Morning..

Rod, I'm curious. We share the optimism about the offshore markets improving next year. In fact, I think that rate of improvement that you touched on, that kind of 5% to 8% probably accelerates throughout the year and into 2020.

And I'm curious if you could just remind us, given there's been a lot of changes in mix during the downturn and in your products business, especially kind of which – what's the time lag between the – I guess on ROVs, we get it. When the rig goes to work, the ROV goes to work.

But on the products side, when do you start to see the pickup on the manufacturing side and on the services side? Is there a tendency on the services side, some kind of delayed service work that actually could pull that forward faster?.

There's the two components. First off, on the manufactured product side with the backlog, we'll start to see the uptick in 2019 as we execute and prosecute that backlog. So that's long cycle-type businesses..

Right..

It typically follows the tree awards. So we're already beginning to experience that as evidenced by our book-to-bill this last quarter. And then you get into the service and rental side, and it's the two components. One is easy to follow. It follows that ROV that you just talked about..

Right..

So when the ROV goes to work, and we have the associated ROV tooling, then we have revenue streams associated with that that you could easily kind of mirror image. The other component is what Rod just described, where it's the large work packages doing hydrate remediation, well stim. That's more the call out type nature. People have problems.

Some of them can be more campaign-oriented. But those are the ones that tend to be shorter-cycle type projects; they're not the long cycle like umbilical..

And they're more likely to happen when commodity prices are high and there's room in the budget to do the work. So....

Okay.

So are you seeing that pickup, I guess, now? And expect to see that continue to increase?.

Well, we're starting to see that increase right now, yes..

Yeah..

And at least a lot of customer inquiries, I mean, with oil prices in the $70, $80 range..

That should help you..

That certainly is benefiting the interest level and unplugging pipelines and getting increasing production flow..

Yeah. Fair enough. Great. Thanks, guys..

Thank you..

Our next question comes from the line of David Smith with Heikkinen Energy Advisors. Your line is open..

Hey. Thanks. Good morning, guys..

Morning, David..

On the ROV segment, with EBITDA margins down almost 4% sequentially, would you say most of that decline relates to the operational efficiencies you talked about earlier?.

Yeah. And I talked a little bit about this moving from rig to rig. Another bit of color I could maybe add is that the other thing we've seen just recently, particularly in the third quarter, is we've talked a lot about, our ROVs haven't been sitting in the yard. Most of the time, we've got them deployed on assets.

What we're seeing now is that we're hydrating the assets we're on. We're taking off – we're taking ROVs from assets and moving them to active assets. And again that adds yet another level of complexity. So I think we saw – that was part of what we saw change quarter to quarter as well.

So another piece of color I'd like to add, I mean, while we're on that topic, is going forward, we're going to also see a little bit of challenge on crewing levels. And we've got – it's a good thing for Oceaneering. We're able to do more remote work. We're able to lean down our crews, which makes us more cost effective for our customers.

But it also takes away a little bit on the margin side. But I think it still works out to be a competitive advantage for the long term..

Okay. Appreciate that. And just thinking about the fourth quarter, it seems like vessel support activity should be down a bit on the ROV side. Probably more floaters coming off contract versus starting.

Is there a reason that the mob and demob inefficiencies would be similar in Q4 versus Q3?.

Yes. If you look at the prepared remarks that Rod read through and talked through, how there were 27 that had contracts expiring in the fourth quarter, the net add for us is probably 15 to 20 that are going back to work in the fourth quarter. So while the overall count may remain the same, the churn within that is fairly great.

So we're looking at having to probably put 15 to 20 ROVs back to work on rigs in the fourth quarter..

Okay. And....

It's just not the same – it's not the same rigs working..

Yeah..

Appreciate it. And just last one on that topic. How do you think about the ability to get back to 30% EBITDA margins for ROV? Is that something that you can control with costs? Or....

I think part of that we'd control cost, and obviously that's something that we're refining. Because think again about competitive advantage. When you think about rigs moving around the world, and these – where that rig finishes and where it's going to next, our global footprint definitely positions us well to operate in that new environment.

But hopefully, when we get back to a longer term environment, a lot of that just – there is just less mobilization per day worked than there has been in this past couple years..

Great. Thanks very much..

Yeah..

Turn it back..

Thanks..

And our next question comes from the line of Brad Handler with Jefferies. Your line is open..

Thanks. Good morning, everyone..

Morning, Brad..

A couple different, I guess, unrelated questions. The first on Panama City, and forgive me if I missed it, but can you speak to – or are you able to manufacture anything there today? Or the impact is because you had to shift to that – to fulfill your obligations, you've had to shift it from – to somewhere else in the world.

And there's expenses associated with that.

And if you could speak to when you'd expect to be able to get that facility back fully online?.

So let me start with the ability to produce, no. I mean, it is – we have – nearly all the equipment was affected. We have to go through all of that to get the lines running again. The only thing I can say is that we're working. We do have completed product that if we get our carousels working and some other things, that we can deliver those products.

And we're working with our customers to make that happen. So there's a little bit of wiggle room there. But the product that was in process is pretty much stopped for the moment in that, you think about a very multi-pass production method, that takes a while.

And it also means that it's not easy to pass that work to have any immediate effect from one business to the next. As far as when we're going to be back to operational, it's really too early to tell. We haven't thoroughly tested all the equipment yet, so it's hard to say..

Are you able to – I know you have multiple facilities around the world.

Do they have some commonality? Are you able to then deliver that product via another facility?.

To some extent. For example, if we were – for new orders we build – and we really don't expect it to be able – or to affect our intake. We can shift some product. But remember, depending on where that product is delivered, this is heavy, expensive-to-transport stuff.

So it's important that whatever is in your contract that you deliver close to wherever you had promised to deliver in the past. So....

Yeah. And I'll say most of the repair work that we're doing – I know most people have not seen the facility. It's a high bay and a low bay, was concentrated on the lower bay area, which is not where our heavy machinery is located as far as the cabler and the armor machine and the extruder.

That bay was less impacted or affected by the storm, primarily roof damage at that point. And they did begin field testing all of the components on the carousel and had it moving yesterday. So....

And I want to clarify, we're talking about how many weeks this is going to take, not how many months or how many years. So, yeah, thanks, Alan, for bringing me back..

Yeah..

(38:54)..

Okay. Yeah. Yeah. It was a lot of the – I just don't have an ability to put it into context at all. So that's fine. Okay..

Yeah..

So it has a modest impact on delivering, sounds like, and – but it's you should be able to make it up within – I don't know if it's a couple quarters or something, but ideally you're back and you're delivering..

Yeah..

Okay. Thank you..

Yeah. And I think what we're trying to do is work with the customer. And the product that was already there ready for delivery, we're making sure that we can get the carousel running first, so we can offload that for the customer.

So we're going through equipment and working through each piece by piece to make certain that we have the least impact on our customer base..

Yeah. The impact of Hurricane Michael was a shift from Q4 to the future, not a deletion of work..

Yeah..

Except for the repair part..

Thank you for all that context..

Thank you..

I have an unrelated question, which may feel – sort of feels a little out of left field as I ask it. But it feels like something I'd like to try to come back to. And it relates to demand for thermoplastic umbilicals maybe overall and then specifically in Brazil.

Because we feel like we've seen some pretty tangible signs that Petrobras is struggling to accept flexible riser in pre-salt development, because of some of the performance on the first couple of fields. And so we're just trying to think, okay, are we – we've seen – I guess I can try to keep it as open as that in a sense.

As the recovery evolves and maybe specifically in Brazil, because I think it's a very important market for thermoplastics, how would you calibrate that?.

Yeah. I would say that Brazil is our center of excellence for manufacturing the thermoplastic hoses and for thermoplastic umbilicals. So they do a tremendous amount of work. And it's not just the umbilicals that we produce for Petrobras specifically. I mean, their designs right now are all centered on thermoplastic design.

So when we get an order from Petrobras, it's for thermoplastic umbilicals. And at the same time....

Thanks for that. Sorry..

So we still see demand for thermoplastics. And Brazil is the one plant that really produces thermoplastics – or is the primary producer of thermoplastic umbilicals today for us..

Okay..

When you look at Panama City, you look at Rosyth, the majority of what they do is steel tube. And they still have capability and some capacity to do some thermoplastic work, if required. But the plant site that is, I'll say, most prolific at it is Brazil for us. And in fact, they will do hoses for work in other areas from time to time.

So when we announced the award for the drill pipe riser, we tried to indicate that not only is it just for the drill pipe riser, but there are associated umbilicals that we'll be producing for that contract in Brazil as well. So there's ancillary goods that we can produce in Brazil from a thermoplastic perspective.

But most of the larger scope work that happens in Rosyth and in Panama City is steel tube in nature, has some level of communication and power component to it, where it requires the heavier duty cabler. Is that....

Okay. I think that....

Did I confuse you?.

No. I think you spoke to it, and that's encouraging to hear that Petrobras as well as others are still comfortable with thermoplastic. So great. I'm all set. Thank you very much..

Thank you..

Our next question comes from the line of Ian Macpherson with Simmons. Your line is open..

Hey. Thanks for the follow up. I wanted to go back to your contract announcement from August with the E-ROV with Equinor and maybe invite you to speak a little bit more about that. Talk about – there are some obvious advantages with the remote operation, and I think the extended deployment times of that unit.

Is this a product that you have developed internally and have IP on? And what do you see as the adoption potential and maybe the disruptive potential of this, vis-à-vis conventional ROVs over time..

So it – yeah. It was fully developed internally. We do have different pieces of IP on the system. I would say that it is a strong desire, not just from Equinor, but from some of the other IOCs as well to have a system that – two big advantages. One of them is for down manning of platforms, so that you can have a system that can be operated remotely.

We take some of the people off the rig and reduces the costs. I guess the – some of the numbers that are out there is, it costs anywhere between 8 times and 20 times as much to have somebody offshore as it does to have that same person working onshore. So we're talking a dramatic reduction in cost, but also just the safety.

And then, looking forward, how big the facilities are designed – how many people they're designed to accommodate. So I think just moving people back onshore and being able to do the same work is a big advantage.

The other thing I would say is that we have a lot of opportunity to operate remotely, and that means that leaving that vessel resident and under water.

And I think, especially for Equinor, where they have infrastructure, where they have power and communications available at the offshore facilities, there's a lot of opportunity to have long deployment, actually cover, at some point, the entire field with remotely operated vehicles without having to mobilize a vessel or a crew offshore.

So I think it is disruptive. It does present a change. I'm very excited that somebody who's been so interested in that technology for so long gave us that opportunity.

And you can see why, because with all the ESG interest there is going on out there, there's a huge carbon footprint opportunity for them as well to take vessels off the water and have vehicles operating under (45:19) water with very low environmental impact..

Yeah. It sounds very interesting.

And do you think that we would see more of these announced for contracts next year probably?.

I think it's going to be a lot of different types of technology that we're seeing more autonomous vehicles, more work being done without – again without a expensive manned vessel that is the custodian and the deployment of those vehicles. It is definitely where a lot of the investment and the innovation is going on in the industry right now..

Very good. Thanks, Rod..

You bet..

And our next question comes from the line of Scott Gruber with Citigroup. Your line is open..

Yes. Good morning..

Good morning, Scott..

Rod, with the outlook for floating rig demand improving and the outlook for ROV utilization improving, at what level of ROV utilization do you think you'll receive pricing power? Historically, where do you start to gain leverage on your customers from a pricing perspective?.

It's tough to pick a point, because you'd almost have to go back to – it's not just the ROV utilization. It's really what's going on in the industry. It seems somewhat emotional that when rig rates start to go up, and there's a feeling that prices are on the move, then we're able to capture some of that, rather than the feel like there's tightness.

And part of it's just because whereas as a rig, you – the next rig is not two months away. You could get an ROV built in a month or two and have that capacity constraint relieved pretty quickly.

So it's really more about, are prices on the move? Do the customers feel concern about timing and the other things that would happen that would allow us to increase rates? So I'd say watch that. And I'd also say that if there is a number, it's probably something north of 70..

Yeah. And I think it's geography, location of work, and ability to service the customer..

It'll happen regionally first..

Yeah..

Yeah..

Got it. So north of 70, but probably south of 85 where we think you get utilization....

I think so, yeah..

...in a lot of other segments, just given the fact that you have kind of more ROVs deployed than what we actually see?.

Right..

That's fair?.

Yeah, because there is – at some point they're not quick to move, as you're pointing out..

Yeah. And I think it's, as we've kind of seen during this downturn, we're kind of seeing the buying influences go from the guys on the rig to a supply chain-based focus making the buying decision. So if we see that shift back to the guys on the rig, that would be beneficial, too..

Yes..

Got it. And the range for growth CapEx for 2018, that just reflects timing of the final payment on the Ocean Evolution.

What's driving the range that still exists on the growth CapEx number?.

Yeah. No, that is one of the primary components, as well as we announced the drill pipe riser contract. So we have some long-lead items. And we're still in the negotiating phase of some purchase orders there as to when the timing of payment on some of those goods might be.

So between the final payment on the Evolution and some of those payments associated with the drill pipe riser, those are the two primary components that need such a wide range..

Got it. Okay. That was it. Thanks..

Yeah..

Thanks, Scott..

There are no further questions. I'll go ahead and turn the call back over to you..

Well, since we have no more questions, I'd like to wrap up by thanking everyone for joining the call. This concludes our third quarter 2018 conference call. Have a great day..

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