Expro Group Holdings N.V. (XPRO) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Frank's International initial conference call to discuss the second quarter results. [Operator Instructions] As a reminder, this call is being recorded and will be made available for replay 2 hours after the call ends on the company's website or by dialing (800) 585-8367 and entering conference ID number of 59333435. Thank you, I would now like to turn the call to Mr. Al Petrie, Investor Relations Coordinator. Please go ahead, sir.

Good morning, everyone, and welcome to Frank's International's initial conference call to discuss second quarter 2013 earnings. Joining me today as speakers on our call are Keith Mosing, Chairman, President and Chief Executive Officer; and Mark Margavio, our Chief Financial Officer. Keith will begin today's call with general highlights of the second quarter and Mark will follow with a more detailed financial discussion of the quarter. Keith will then wrap up with some closing comments. Before we begin commenting on second quarter results, there a few legal items that we'd like to cover. First, remarks and answers to questions by company representatives on today's call may refer to or contain forward-looking statements. Such remarks or answers are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These statements speak only as of today's date or, if different, as of the date specified. The company assumes no responsibility to update any forward-looking statements as of any future date. The company has included in its SEC filings cautionary language identifying important factors, but not necessarily all factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in company SEC filings, which are publicly available in the SEC's EDGAR system. Also you may access both the second quarter 2013 earnings press release and a replay of this call on our website at www.franksinternational.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in the second quarter 2013 earnings release, which was issued by the company yesterday. I will now turn the call over to Keith for his comments.

Thank you, Al, and good morning, everyone. What I'd like to just say is we had a record year last year. This year, we're -- we've been doing this for 75 years, and we're here to discuss our second quarter earnings. And I'm pleased to say, we had a record year last year. We're exceeding, and it looks like we're on the possibility of having another record year. And so this is mainly because of increasing demand offshore, as well as land. Even though land work has -- rigs have been down slightly, we've seen an increase here in the third quarter. So we think that's a very positive note. Our international customers, as well as our U.S. customers, are poised to continue with their activity. Some of the biggest increases have been in our Pipe and Products. Just to give you a little example, we went from $24.5 million to $56.5 million on our Pipe and Products. This is primarily due to pipe sales around the world. And we're looking forward to our new position as a public company, which will give us all the benefits that we planned. And it looks like the customers are supporting us very much. And we're in line, like I say, for another record year. So at this time, I'll turn it over to Mark. And he'll review all of our financials for the second quarter.

Thank you, Keith. I'm sure you saw our earnings release yesterday. And we will be filing our 10-Q with the SEC after this call. Our financial results for the second quarter were consistent with the capital information presented on Page 7 of the IPO prospectus. Here's a brief overview of the quarter's results and how they compared to the second quarter of 2012. Total revenue for the quarter was $293 million, which reflects an 11.5% increase over the prior year second quarter of $262.7 million and a 27 -- 26% increase over Q1 2013. This was the highest revenue quarter in the company's history. Net income from the continuing operations was $101 million, which reflects a 13.2% increase over the prior year's $89.2 million and a 41.6% increase over the first quarter of 2013. Adjusted EBITDA for the quarter was $128.1 million, a 10.9% improvement over the $115.5 million generated in the prior year and 29.3% from the first quarter of 2013. This was also a new record for the company. Finally, we reported net income of $141.9 million for the quarter, which included discontinued operations of $40.9 million, $39.6 million of which came from realized gain on sale of a component of our Pipe and Products segment. This business manufacturers centralizers for sales to third parties and was sold on June 14, 2013. Second quarter EPS from continuing operations was $0.85 per share compared to $0.75 per share last year based on 119 million shares outstanding. After the IPO, we had 206.5 million shares outstanding on an as-converted basis, and our EPS on a pro forma basis will be approximately $0.46. The effect of the post-IPO share count and tax impact will be fully recognized beginning in the fourth quarter of 2013. The improvements in our results year-over-year was primarily attributed to the increased demand for our services and increase in our international pipe sales. Our services revenue increased 7.8% year-over-year. Our Pipe and Products sales increased 29.5% on a lower base. The increase was predominantly due to the delivery of a large LT -- TLP order and international pipe sales to existing customers. Sequentially, our second quarter results were even more impressive, with total revenue increasing 26% and adjusted EBITDA increasing 29.3%. Much of this improvement is due to the relative weakness of our first quarter 2013 that was negatively impacted by the bolt issue in the offshore Gulf of Mexico, which caused delays from our customers in the first quarter. Those issues have since been addressed, and our second quarter results in the Gulf of Mexico were quite strong. Our onshore casing business in North America continue to reflect the current soft market due to lower natural gas prices that characterized the region in the first quarter as rig and well count levels continue to be flat to lower versus the prior year. Our international operations was very strong and were driven by increased revenues from our existing customers. Our overall EBITDA margin of 43.7% remain consistent with prior year, despite a quarterly decline in our International Services segment due to increased staffing levels and management, currency exchange cost and bad debt expense. While currency was not a significant factor in the quarter results, we were negatively impacted by the strength of the U.S. dollar. Only about 25% of our revenue was invoiced in other currencies. We did have a slight reduction in income tax expense for the quarter, which reflects a change in the mix of earnings between the U.S. and other countries. However, in future quarters, we anticipate showing an effective tax rate between 25% and 27%, depending on the mix between the U.S. and international sources of income. Our financial results will be fully impacted by the change beginning with the fourth quarter of 2013. A few comments on the balance sheet. We closed the IPO, including shares issued pursuant to the overallotment, on August 14. Consequently, we sold 34.5 million shares in the offering for net proceeds of $712 million. We used a portion of these proceeds to repay in full the outstanding notes, with the remainder of the proceeds now on our balance sheet. None of these transactions are reflected in our reported second quarter results. Following the offering, as of August 31, Frank's International had approximately $500,000 of debt outstanding and approximately $400 million of cash on hand. Concurrent with the IPO, we entered into 2 revolving credit facilities. One of the facilities is $100 million revolving credit facility that will mature in August 2018. The other facility is a $100 million revolving credit facility that will mature in August 2014. Subject to the terms of the credit agreements, we have the ability to increase the commitments under the facilities by $150 million. As of today, both facilities remains undrawn. Our 2013 capital expenditure budget is $200.3 million, of which $164 million is for the purchase and manufacture of equipment and $36.3 million is for the purchase of construction of facilities. Our budget does not include any provision for acquisitions. For the first 6 months of this year, we have invested $87.5 million in CapEx, primarily for revenue-generating equipment for future deepwater rig deployment. All of our capital investments were funded from internally generated funds, and we believe the remaining net proceeds from our IPO, together with cash flows from operations and possible borrowings out of our credit facility should be more than sufficient to fund our CapEx requirements for the remainder of 2013 and 2014. We expect to declare a dividend of $0.075 per share for the record date November 29, with a payment date of December 19, 2013. I will now turn the call back over to Keith for some final comments before we open up the call to Q&A.

In closing, I'd like to thank all the people who assisted Frank's with our recent IPO. That includes our lead underwriters, co-managers, attorneys, consultants and everybody on our management team who worked very, very hard to complete everything that we did. I must admit, it went a lot smoother than I ever anticipated. We met a lot of nice people along the way. It's made Frank's International a lot stronger company and we've added financial muscle and flexibility, so we can grow organically and pursue acquisitions and expand the company and our current services and products that we offer. We welcome our new shareholders and look forward to continuing greater communications with you and our team of sell-side analysts, quarterly calls and future conferences and one-on-one meetings. Again, thank you very much. And Al, I think we're ready for any questions anybody might have.

[Operator Instructions]

Thank you. Brandy. I want to let everyone know that we also have John Walker, our VP of International Operations and Mike Webre, our VP of Engineering with us today for questions as well. [Operator Instructions]

Your first question comes from the line of Jim Wicklund of Crédit Suisse.

Can you do me a favor, Mark? Can you walk through the CapEx again for the quarter and expectations for the year and the breakdown? I just wanted to get a clear understanding of where the CapEx is going this year.

Okay. We have $203 million (sic) [$200.3 million] of CapEx that we expect for this year. Changed a little from last year in that we have about $10 million that we spent on buildings so far, and we haven't done that yet. Most of the revenue (sic) [CapEx] we anticipate going to operating or revenue-generating equipment and approximately $36 million of it is to building and facilities.

And where are the buildings and facilities, is that somewhere around the deepwater area in foreign countries? Or is this all pipe yard in Louisiana?

It's both.

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

I think a nice aspect of your second quarter was the margin improvement in your U.S. Services, up to 51%. And Mark, I think you mentioned that you still were seeing fairly anemic contribution from your land business in the second quarter, which is improving on a leading-edge basis in Q3. So could you comment at all about what your visibility is for your U.S. margins in the second half of the year given that -- at least, somewhat of an improvement on the land side?

All right. I think we anticipate that the offshore Gulf of Mexico will increase in revenues for this quarter, for the third quarter, which will positively impact our margins. Land still remains flat to up in most of our locations. So we are seeing a little more positive in that area at this point.

Okay. And then in the products -- on the product side, the quarterly results tend to be a little bit lumpier it seems, but if we look back at first half of last year, you derive about half of your EBITDA for the full year in the first half even though the quarters weren't necessary even. How much visibility does that business have more than 2 quarters out? And can you talk at all about the growth prospects in the second half for product as well?

Well, we're seeing a fairly significant expansion in the sales in our international markets. That's been probably a base driver. We did complete a couple of large load outs in the second quarter as well in the U.S. But in general, the expansion is from international. And we expect that to grow over the next couple of years. It's a little difficult to give you a projection at this point in time because delivery times change, and we recognize the revenue at the time of delivery.

Your next question comes from the line of Robin Shoemaker of Citi.

So I wanted to ask Mark, you've mentioned in the press release that after the IPO, you're going to be reporting a noncontrolling interest. And so what should we expect the third quarter to look like in contrast to what we see here?

As far as -- there's 2 major impacts that are going to happen to the financial results. Number one, we're going to have more shares outstanding, which will, of course, reduce the earnings per share. The second thing you're going to see is that we're going to start August 14 accruing the taxes as a public company, which will be greater than it's been in the past, of course. So those 2 things will impact our earnings per share. Just to kind of give you an idea, the earnings per share will be about -- assuming that was all in full swing now, likely it will be in the fourth quarter, the earnings per share would be about $0.46 a share, will be a similar number for us. As for the minority -- the noncontrolling interest, it's not really a very complicated calculation, but just to make sure when you're looking at the numbers, you're looking at net income, you would use the entire -- before the noncontrolling interest, the entire 206.5 million shares outstanding. And then after the noncontrolling interest, you want to use the 153 million shares.

Okay, got it. Could I ask also, since you do have now $400 million of cash, no debt, you're obviously in a very strong position to both grow the business and make acquisitions. When -- I don't expect you to indicate what kind of acquisitions, but you've got equipment and services and a broad geographic footprint already. So is there any kind of general direction that -- where you could tell us that you would like to grow?

This is Keith Mosing. What we'd like to do is -- and as you recognize the global footprint, and I think what's important is to stay focused on basically what we do, but add any kind of tangible products or services that we can. It would be my favorite to buy or acquire something that would be here in a local point that could be redistributed around the world, whether it's something we acquire overseas or we develop in-house. And a lot of where we're spending a lot of time and effort developing products and services in-house that can be spread all over the world also. So we've only been out of the box now for about 5.5 to 6 weeks, but we're very eager. And like I said, we have been in the M&A business for a long time. We've made over 50 in the last 30 years. So we're going to stay focused. As you know, right now multiples and trading are quite high. And we're not going to just jump out there and blow a bunch of money just because we have it. Hopefully, things will be coming.

Your next question comes from the line of Blake Hutchinson of Howard Weil.

Just first of all, you mentioned in the release some allusion to royalty payments and was hoping just to get some information or insight into how these can impact you on a quarterly basis? And the variance and whether they're on kind of usage-based payouts or kind of annual contracts. Any color you can give around that would be welcome.

John, why don't you answer that.

This is John Walker. As far as royalty basis, we've set up within the industry a safety device from an interlock basis, and we royalty that out. And it's going to continue thereafter for the term of the patent, which are substantially far out. So we issued a report from a reconciliation that recently occurred, and we can see that would be continuing on a go-forward basis.

Okay, great. There shouldn't be any variance going forward. I appreciate that. And then just following up on Robin's question, understanding the differential between kind of the reported number before the noncontrolling interest and after. Is it your -- I guess, what should we be focused on or what would you like to call the analytical community's attention to in terms of what we'll be reporting going forward as the headline number, what we should be recording as the number to the reporting agencies?

Well, I think that in terms of earnings per share or which one?

Yes, the EPS number, I mean, should we be more attentive in future quarters as you release to the number based on the fully-diluted share count or will you guys be using the number adjusting for the noncontrolling interest as your headline number?

I would say we're using the net income number before the noncontrolling interest. I think the biggest thing you should be aware is that the taxes in the past have been paid by the shareholders, and that will be corporate income tax. That's probably the #1 biggest impact to the change for the U.S. And the second piece, of course, is the IPO dilution. That will be with shareholders as well.

Sure. I guess the mechanics, I just want to make sure you call attention to what we should be paying attention to here. So I appreciate that, and we'll use the fully diluted number then.

[Operator Instructions]

Okay, Brandy, I assume there are no further questions.

I have a question, where is everybody? I mean, there's no...

Yes sir, there are no further questions.

Okay. Thanks, everyone, for joining us today.

Wait for it.

Wait. Okay. I think, Brandy, did you get another question?

Yes, sir. We do have a follow up question from the line of Jim Wicklund, Crédit Suisse.

Have we seen any shifts or changes in market share or costs in the deepwater over the last couple of quarters? Any change in competition?

Jim, this is John Walker. As far as the market share, we're maintaining our market share with a slight penetration. But as you know, the market is substantially increasing. And the 100 new drilling rigs that are coming out from now until the end of '15, we're well positioned to take that surge. We've invested from a CapEx. But the earlier question, the CapEx $165 million for this year. We're on track with $87.5 million for the 6 months on delivery. So our manufacturing group has certainly kept up with that demand. There would be a struggle. We talked about it on the roadshow, the Wood and Mackenzie (sic) [Wood Mackenzie] report, 39,000 people short within the industry. Those 100 new drilling rigs that are coming out are going to require a headcount of 25,000 people. So there's going to be a dilution within the industry of expertise. This, we believe, puts us in a good position because we focus our efforts on mechanization. And the mechanization with this next-generation of rigs is a good fit for us. Moving people away from well center, out of harms way, and also allowing the operation to efficiently transition from the auxiliary mast operation over to the drilling operation. So we are maintaining our market share. We're certainly going to see an upsurge in the deepwater arena. And in the CEO conference last week in New York, you saw the general consensus that all these new drilling rigs are coming out, but there's only 16% of the drilling rigs are coming out are actually working in the ultradeepwater sector of the market at the moment. And that's good for -- we believe that to be good for us because we are in a substantial portion of that market. But the remainder of the 131 drilling rigs in that sector are actually working in the deepwater sector. And we have a significant presence globally in that sector also. So we continue to focus our energies on the technology, the applications. We're harvesting good free cash flow as a result of that. And we see that as a good potential going forward. This is a great moment for our company, the record results. And we see that for third quarter, there's no reason that we couldn't be in with that budgeted forecast.

John, that's really helpful, let me follow-up. With the $165 million in new equipment, you mentioned that it's basically for rental equipment. Can you break down for us how much of your CapEx this year is going to be maintenance? And when you talk about rental, this is equipment tools that you're manufacturing that will be put on rigs and generate rental income even when it's not being actively used?

Sure. Traditionally, our maintenance CapEx has been between 5% and 7%. And the remainder would be for growth CapEx and it's -- the way in which we've done this, we've invested substantially from last year and this year. And we would see that the '14 numbers based on current market sentiment would be something traditional to what we're doing in '13. Now I would say after that, we should see a substantial reduction in our CapEx as we then start to go into utilization. So as far as revenues, you were talking about revenues, the revenues from a standby perspective, we don't see any price pressure at this point.

Okay, everyone, thank you for joining us today, and we look forward to talking to you further and seeing you at some of the upcoming conferences.

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