McDermott International Earnings Call Insights: SURF, Margins

On Friday, McDermott International Inc (NYSE:MDR) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

SURF

Andy Kaplowitz – Barclays Capital: So Steve, as part of looking at this strategy of McDermott, how do you get investors comfortable with the change in the backlog, in a sense that you are now, as you said, half SURF, McDermott historically has said, we do best what we have done for a long time, which has been shallow and conventional, so as you focus on SURF, how do we get comfortable that we’re not going to have hiccups in the new business as we go forward?

Stephen M. Johnson – President and CEO: Let me give you a broad response and maybe use the INPEX project as a proxy here. As I mentioned in the prepared remarks Andy, we’re all about in the bidding stages planning for early de-risking of the project. On that program, we intended purposefully to subcontract out a significant piece of it as we ready ourselves to grow into this market further and in the first 90 days after the award, we took great pains and great efforts to work with our suppliers buyout those supply contracts. That’s just a method. So, there is one response to you. How do shareholders get comfortable with us moving into this market? I think they’ve got to have confidence that McDermott has a method to approaching this market. We don’t bid everything that comes our way, and what we bid on we’re highly selective and the criteria for bidding the deepwater SURF subsea markets. First, do we have the resources? Second, do we have the capability and can we expect contract for the capability? Third, do we have an ability to get visibility on this project so that in any of these projects, so that we can identify upset conditions. We felt that way about INPEX. We felt that way about (SeCaP) we felt that way and feel that way about a number of others that are in the pipeline. The good news here is we have the assets with the 102 and now the 105, and in a couple of years the new 108. Assets are a key, management discipline is a key, but preparing for the risks and derisking the project would be my overriding response to your question.

Andy Kaplowitz – Barclays Capital: If I focus on the Middle East for second in particular, it’s been a very strong historical region for you. You backlog is down a bit over the last couple of years. Is there anything that’s materially changed in that region either more competition now or is it just sort of the pendulum has swung and you’re about to win a lot more work there?

Stephen M. Johnson – President and CEO: Look the first thing to say to you is – if I could just say it this way, nothing is broken in our Middle East segment. In this particular quarter we had about $11 million of fewer closeouts compared to Q1 of last year which was the needle mover. The rest of the movement is largely just mix issue. From a competitive standpoint, same competition we’ve been seeing for years. I think you would have to chalk this up a little bit more to deal flow and timing than anything else. Would you add anything to that Perry.

Perry L. Elders – SVP and CFO: No, that’s exactly right. As we look at the bids outstanding on the target projects there’s a number of opportunities coming up in the Middle East, both in Kingdom of Saudi Arabia as well as Abu Dhabi and other markets there.

Andy Kaplowitz – Barclays Capital: Just one quick clarification, Steve or Perry. You said $5 million charge on PEMEX, was that in 1Q or is that in 2Q?

Stephen M. Johnson – President and CEO: That was in 1Q. Just to make sure you got that; that was done more consciously than some of the other charges. We swapped out a vessel and we swapped out a vessel for our own vessel, which lengthened the project, which resulted in higher costs than our vessel and the length of the time, but that will get offset in I would expect Q2 because of the utilization of the DB16. So, in my parlance; it was be a wash.

Margins

Bryce Humphrey – BB&T Capital Markets: This is Bryce Humphrey on for Rob. I appreciate your commentary on the margin front. I wanted to dig in a little more. Your performance this quarter was obviously impressive, especially relative to where you’re thinking you are going to be at this point of the year. You’ve talk about historically or at least the last quarter or so, marine vessel days being a big swing factor for margins this year. So, could you just talk a little bit about some of the initiatives you are taking to fill what was I guess 400 day gap versus last year and maybe update us on where vessel days book stands versus this time last year?

Perry L. Elders – SVP and CFO: As I mentioned in the comments there, we did enjoy 62% utilization, which was ahead what we expect for the year, which is below – we expect the year to be below 50%. So, we’re in a substantially different position as we look at the rest of the ’12 than we were last quarter. We had a nice first quarter, but that under utilization of those vessels is part of the drag on the margins and the reason for our guidance. Now, as it relates to the second question, what are we doing about it? We principally have our vessels to fit on EPCI jobs, we believe it’s a strategic advantage to have that marine fleet, but we do look for work to fill in between EPIC jobs, and so we’re obviously actively looking to put those vessels to work on marine-only jobs.

Bryce Humphrey – BB&T Capital Markets: I have a follow-up there on margins. If I recall correctly, I think you’ll have a few projects winding up in the back half of the year, especially the Atlantic, which I guess could result in some closeout opportunities. Is that the case and if so is that another potential margin lift towards the back half of the year?

Perry L. Elders – SVP and CFO: What Steve mentioned in his comments earlier was that a part of what we enjoyed in Q1 was the shifting of some of the timing on some of those project closeout contingencies into Q1 from the back half. There is further estimated closure of projects and contingency harvesting in the latter part of the year. The exact timing of that, obviously, we’re not going to give up anything with customers on it, to get it closed out earlier, but it could occur earlier in the year that’s why we are kind of challenged who estimate, which specific quarter is going to come in.

Bryce Humphrey – BB&T Capital Markets: Last one on revenues, you expect to burn $2.8 billion this year from current backlog and you are targeting in the kind of the mid $3 billion, so can you just talk about how you fill that gap, is that additional bookings over the next quarter or two that start to generate revenue pretty quickly or is it just some of your more typical quarterly booking burn work?

Stephen M. Johnson – President and CEO: I really don’t think there is a gap there, Bryce. We did $728 million of revenues in the first quarter and we’re expecting $2.8 burn for rest of the year.