McDermott International's CEO Discusses Q1 2012 Results - Earnings Call Transcript

McDermott International (MDR)

Q1 2012 Earnings Call

May 11, 2012 10:00 am ET


John E. Roueche - Vice President of Treasurer & Investor Relations

Stephen M. Johnson - Chairman, Chief Executive Officer and President

Perry L. Elders - Chief Financial Officer, Principal Accounting Officer and Senior Vice President


Andy Kaplowitz - Barclays Capital, Research Division

Bryce D. Humphrey - BB&T Capital Markets, Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Robert Connors - Stifel, Nicolaus & Co., Inc., Research Division

Steven Fisher - UBS Investment Bank, Research Division

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Scott J. Levine - JP Morgan Chase & Co, Research Division

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Brian Konigsberg - Vertical Research Partners Inc.

John Rogers - D.A. Davidson & Co., Research Division



Ladies and gentlemen, thank you for standing by, and welcome to the McDermott International First Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Jay Roueche. Please go ahead.

John E. Roueche

Thank you, Pamela, and thanks to everyone who's joining us this morning. We appreciate you participating today as we discuss our results from the first quarter of 2012, which were released yesterday through our press release and in our Form 10-Q.

As usual, I have with me today Steve Johnson, McDermott's Chairman, President and Chief Executive Officer; as well as Perry Elders, our Senior Vice President and Chief Financial Officer. Before I hand the call off to Steve, let me remind you that this event is being recorded, and a replay will be available for a limited time on our website.

In addition, some of our comments this morning will include forward-looking statements and estimates. These forward-looking comments are subject to various risks and uncertainties, and they reflect management's views as of May 10, 2012. Please refer to our filings with the Securities and Exchange Commission, which are available on our website, including our Form 10-K for the year ended December 31, 2011, and yesterday's 10-Q, which will provide a discussion of factors that may cause our actual results to differ from management's projections, forecasts, estimates and expectations. And please note that, except to the extent required by applicable law, McDermott undertakes no obligation to update any forward-looking statement.

Let me now turn the call over to Steve for his opening remarks.

Stephen M. Johnson

Thanks, Jay, and good morning, everyone. In my view, McDermott had a very good start to 2012 with this quarter's results. Two months ago, we thought our first quarter results would be softer, but clearly, the operations and our project portfolio exceeded our prior expectations. Some of this outperformance was timing-related, some projects showed good improvement and we had cost savings, and importantly, we didn't have a large one-off project charge or charges that affected the last 2 sequential quarters. Adding to our solid financial results, the company also had its best quarter of bookings in its history at over $2.6 billion, which grew our backlog to $5.8 billion, also a high watermark in the history of the company.

Before I get too far into our prepared comments, let me give a brief outline of our intended discussion this morning since we're likely to go a little bit longer than usual. I'll provide a few more comments on the quarter before handing off to Perry to cover our financials in detail and supply some other metrics, then I'll return for my view of McDermott's strategy, both what we've been implementing as well as what we expect to be doing going forward. My objective is to be as transparent and fulsome with respect to growth plans and strategic direction as is reasonable given this broad audience. Following our prepared remarks, we'll open the call to questions. So let's get started.

As I indicated, we're quite pleased with the first quarter 2012 in many respects. McDermott reported net income from continuing operations of $59.3 million with earnings per share of $0.25. I've always said not to read too much into any one quarter, but it's a lot better saying this when we delivered solid results like this period.

While I don't intend to spend much time on it, I do want to update you on the Atlantic loss projects that impacted the last 2 sequential quarters. Both the PEMEX and Brazilian charter contracts continue to progress and go well. The Agile project has performed well or better than expected. On the PEMEX job, we changed the logistics somewhat and made a decision to release our contracted dynamically positioned vessel and then to perform all the remaining work with our own DB16 vessel. This change results in the contract taking a little longer to wrap up and an additional project charge this quarter of about $5 million, but this amount should be offset through increased utilization benefits through the second quarter.

As I also mentioned earlier, the company's backlog reached record levels at March 31, 2012, with a total of $5.8 billion. Bookings over $2.6 billion don't happen every quarter but we were pleased to be awarded this amount in the 2012 first quarter. Clearly, INPEX Ichthys award was the largest contributor. Even without this award, however, our bookings in the 2012 first quarter would've exceeded the amounts we reported in each of the last 2 sequential quarters. And in fact, the level of bookings in this first quarter alone exceeded the total we had for all quarters last year 2011. So similar to earnings, we're off to a very strong start for this year.

As we discussed in last quarter's conference call, the INPEX Ichthys subsea booking is our largest single award ever at the time of contract signing. Although the reported revenues don't really start flowing until after 2013 and primarily in 2014 and '15, we've already committed about 40% of the total contract costs to procurement orders and subcontracts. And in addition, we've entered into hedges for most of our expected foreign exchange exposures. To say it another way, we believe that we've significantly de-risked a large portion of this project in a fairly short order.

In addition to the INPEX project, we also received another sizable subsea order in the Asia Pacific region, which we expect will utilize our new North Ocean 105. This is the SeCaP project, a deepwater job in over 4,000 feet of water installing pipe and pipe flow lines, risers, umbilicals and umbilical packages. There are a number of firsts on this job, and as such, we'll utilize our deferred profit recognition policy. Virtually all the revenues are expected in 2012 anyway, so following this approach should have minimal impact on 2012.

The other notable award was the KJO Hout project, which is an EPCI award in the neutral zone between Saudi Arabia and Kuwait. The scope includes a jacket, deck-associated pipelines and some brownfield demolition work.

Additionally, we had about $130 million of bookings this quarter come through change orders, scope increases and settlements. Over the last 4 quarters, we've averaged about $235 million per quarter from this type of bookings, so the first quarter was somewhat below the recent average. However, we more than made up for it in new awards, predominantly in the Asia Pacific segment.

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