Welcome to the Q1 2016 Frank's International N.V. Earnings Conference Call. My name is Vanessa and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. And I will now turn the call over to Mr. Blake Holcomb. Sir, you may begin.

Thanks, Vanessa. Good morning, everyone, and welcome to Frank's International conference call to discuss the first quarter of 2016 earnings. I'm like Holcomb, Director of Investor Relations. Joining me today on the call are Gary Luquette, President and Chief Executive Officer; Jeff Bird, Executive Vice President and Chief Financial Officer; and John Walker, Executive Vice President of Operations. We have posted a presentation on our website that we will refer to throughout this call. If you would like to view this presentation, please go to the Investors section of our website at franksinternational.com. Gary will begin today's call with an operational highlights and overview of the quarter. Jeff will then provide additional detail on our operations and financial results. Gary will then conclude with his closing remarks. Everyone will be available for questions after the prepared comments. In the interest of time, we ask that you limit yourself to one question and one follow-up question during the Q&A session. Before we begin commenting on our first quarter results, there are few legal items we would like to cover, beginning on page 3. 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. Such statements speak only as of today 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 filings cautionary language identifying important 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 the Company's SEC filings, which may be accessed on the SEC's website or on our website at franksinternational.com. There you may also access both the first quarter earnings press release and a replay of this call. 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 first quarter of 2016 earnings release, which was issued by the Company earlier today. I will now turn the call over to Gary for his comments.

Thank you, Blake, and good morning to everyone on the call. First quarter 2016 results for Frank's are further evidence of how challenging market conditions in our industry have gotten over the past 18 to 24 months. The headwinds we face and the pace at which the activity can deteriorate over the course of only a few months has been extraordinary. In just the past quarter, we have seen well count in the U.S. onshore market drop more than 40%. During the same time period, we have seen an additional 14% decrease in the number of rigs operating in the Gulf of Mexico. From the peak in 2014 through the end of the first quarter 2016, we have seen the offshore rig count decline as much as 40%, depending upon the region. When you examine floating rig count that more often employs our advanced technology, during that same time period the impact has even been more severe, ranging anywhere from 30% to 60% with our two most prolific operating areas, the Gulf of Mexico and West Africa, down 37% and 50%, respectively. In many previous cycles, the industry was typically able to weather short to medium term commodity price declines by adjusting capital spending, managing cash, and applying pricing pressure to the service sector for a period of time until prices recovered. However, in this most recent cycle, due to the extended downturn in prices and the lack of transparency as to when we will see a recovery, customers have drastically reduced budgets and they are deferring as much work as possible. This has created a supply-driven scenario where there is no predictable end to activity reductions or pricing pressures. Consequently, this has resulted in a steeper and more prolonged downturn where service and E&P companies alike are reporting negative…

Thanks, Gary. Beginning on Page 8 are the financial results for the first-quarter 2016 and the comparison to the previous quarter. Revenues from the international and U.S. services segments, combined, fell roughly 16% from the fourth quarter of 2015 to 132 million, slightly below our expectations. Tubular sales segment fell 53%, meaningfully below our guidance. The tubular sales reflected the impact of a 75% reduction in the backlog of orders from a year ago, translating to less-than-expected international and Deepwater fabrication projects. Tubular sales, which had served as a tailwind in 2015, reversed course in the first quarter of 2016, leading to a greater than anticipated decline in the overall company sequential revenues of 24%. Adjusted EBITDA for the quarter saw a decrease of more than 50% sequentially to $32 million or nearly 21% of revenue. The decline was largely due to a slowdown in the U.S. offshore business, a net loss in tubular sales, inclusive of manufacturing costs, and higher corporate expenses. This led to an adjusted EBITDA contribution of $270,000 between the U.S. services and tubular sales segments combined, leaving the international segment's $31 million as the main driver of adjusted EBITDA for the quarter. Additionally, the international segment also represented over 50% of the company's revenue for the quarter, further demonstrating that the decline seen in North America and tubular sales in the Gulf have been more significantly impacted by the decreases in volume and pricing than the international regions. Even in the midst of these lower revenues and adjusted EBITDA margins, Frank's was able to again generate positive free cash flow for the quarter. The roughly $38 million of free cash flow, or 25% of revenue, was boosted by lower than-budgeted capital expenditures of $8 million. This led to a further increase in cash on the…

Thanks, Jeff. Before we open up the lines, let me wrap up on Page 12 with a high-level overview of our outlook and key themes for the remainder of the year. As mentioned earlier, we continue to see downside risk to the international services segment, primarily in Latin America and West Africa. The challenges facing Latin America in regards to the ability of customers to meet financial obligations have been well-documented, as has the challenge to the economics of some of our Deepwater plays. In the West Africa region, current trends suggest that it will suffer the most severe declines as a dramatic reduction in rigs of approximately 30% by the end of Q2 appears to be likely. Even growing or holding market share and taking further cost reduction actions is not expected to offset this decline in activity. Longer-term opportunities in the region exist but are not expected in the near-term, and are significantly outweighed by the poor outlook we have for 2016. In an attempt to mitigate some of the impact from lower activity levels expected for the balance of the year, we are continuing our efforts to increase sales in active areas as well as in underrepresented markets. In addition, we are taking further actions to reduce costs. While some of these actions will likely bear fruit in the near-term, all actions we take consider the inevitable recovery. And we will ensure that we have the people, the equipment, and overall capability to adequately respond when that time comes. Taking into consideration the downside pressures to our key international market for the remainder of the year, it is important that we align on expectations. Though it is difficult to predict, even as we continue to make changes to improve our underlying cost base, Q2 results and likely the remainder of 2016 may look no better than Q1 unless conditions materially improve in the market. In closing, we remain committed to controlling the things we can control, and are taking the steps necessary to improve the efficiency and cost effectiveness of our business while maintaining or growing our market share as profitably as possible. We can ill afford to waste this down cycle waiting on macro conditions to improve. Frank's is well positioned to take advantage of our strong balance sheet, market-leading position, and talented workforce to become a Company that emerges leaner, more efficient, stronger, and more respected than before. To achieve this end, we will continue to compete for market share; deliver safe, reliable and cost-effective services to our customers; while potentially broadening our service offerings through an acquisition, if the right opportunity presents itself. With that, I would like to thank you for your time and interest in Frank's. And we will now open up the call for questions.

[Operator Instructions] We also ask that you please limit yourself to one question and one follow question. [Operator Instructions] And it looks like we have our first question from Robin Shoemaker with KeyBanc.

So I wanted to ask, on the share buyback decision, does it in any way communicate something about the M&A opportunities? Of course, you have stressed, since the downturn began, that M&A opportunities would be significant for Frank's and that you expected the bid-ask spread to narrow somewhat as we went through the downturn. Do you see any evidence of that? Or has it been somewhat disappointing?

Yes. Just to answer your question, it really doesn't change -- this is Jeff Bird -- it really doesn't change our outlook on M&A. We continue to actively review the market and be close to the market, as I think we've discussed on a number of calls. We reviewed over 50 deals last year, and continue to do that. We do see the bid ask starting to narrow, so we're optimistic about that. But the share buyback itself, we just view that as good capital allocation, good corporate process.

Okay. My other question just has to do with the Middle East market, where you have indicated a pickup in activity. Since that's a jack up market, I wonder how the growth of that market will what's driving it, and the size of the opportunity relative to the decline you are describing that lies ahead for West Africa.

This is John Walker. So actually on Q-over-Q basis, the Middle East we had a contraction in market share on the offshore side of the business, but we did secure a significant opportunity in the onshore side of the business. So we have a good franchise in the Middle East and we are working toward executing on several opportunities onshore. We actually do have some offshore opportunities that will roll into the tail end of Q2, and then it's a multiyear contract for the second half of this year. That does not actually offset the decline from our two major markets, which would be the Gulf of Mexico and West Africa. So this is why we are certainly messaging that, from a full year perspective, we do see a decline in the tubular services.

Thank you. Our next question comes from Kurt Hallead with RBC Capital Markets. Go ahead, Kurt.

I was wondering if you might give a little bit more color and perspective on your expectations on international pricing pressures, and what that impact could potentially be on detrimental margins as we move forward.

So from a pricing pressure perspective, internationally, we've seen an approximate 20% reduction in pricing in West Africa. But the major concession really is around the activity. There has been a significant reduction in activity in West Africa, orientated around the poor exploration results; obviously, the lower commodity price right now. We've seen in the quarter deferrals and actually, in some cases, cancellation of appraisal and development projects. So we are holding market share, but the overall market is contracting. Now, from an APAC perspective, we have endured some recent pricing pressure there and managing to hold market share and, in fact, gaining on it. So it's a mixed the Latin American market, that's not price pressure driven, it's really addressable market contraction. Europe is a small part, single digits, of pricing pressure; but, again activity reductions.

Great. And I think, if I can recall correctly, in your first quarter you indicated that you thought that pricing had stabilized in the U.S. market. Given the significant drops in activity that we continue to see, and are expected to see the second quarter, is that still the perspective?

Sure. So I'll take that one on the offshore side. We saw increased competition in the offshore side of the business, Gulf of Mexico. But the addressable market has a material contraction. The U.S. onshore side of the business continues to drive irrational behavior around pricing, but it's not sustainable. And with our balance sheet, we are in for a strategic long haul. We are seeing competition fall off. And I would say that we are definitely seeing the results because we are maintaining a market share in the 30s.

I think, if you look at the Q-on-Q change in U.S. services, about 80% of that revenue change is related to volume, with 20% related to price. And the bulk of that price ended up being more offshore than onshore.

Thank you. Our next question comes from Jim Wicklund with Credit Suisse.

In terms of the U.S. onshore market, is your best growth from here doing what you did last time, which is making an acquisition of one of the existing companies? Or, considering you had mentioned some of them are going out of business possibly several of them could. Do you expand organically, since you were talking in the past about a little overcapacity of equipment in those markets, anyway?

Right now this is Gary. I would say our market share continues to inch up as the service sector around us continues to collapse because of poor rates and pricing pressures in that segment. At the present time, I would say we are pretty satisfied with our market position. And if the market continues to collapse around us, I think our opportunity really is to start pushing back on some of these low rates that we are having to work at now, and hopefully start seeing some rate recovery in the second half of the year to try to start clawing back to a neutral position. But I think right now, if you step back, when we were thinking about our acquisition some 14, 16 months ago of Timco, we were hoping to get ourselves to a point where we had a 25%ish sort of market share. Now we are there, and then some. So I really like the position we have now. And likely our market share will go up, just because of the collapsing market around us.

Okay, makes sense. And my follow-up, if I could, the Gulf of Mexico, you talked about how much it's down, and how bad it is. How much worse does it get? And you had said that there was increasing competitive pressures. New entrants? Existing entrants? Can you talk to us a little bit about -- more about more about the Gulf of Mexico and the outlook?

Yes. It's more existing players; there's not a new entrant. And I will say we expect this thing to get close to a market bottom. But that's not to say that you won't have, in a prolonged period of prices and contraction in activity, somebody come in and try to undercut because they see a strategic reason to do so with a specific operator, and all that. But we mentioned in our previous quarter's call that we thought the U.S. offshore business was starting to reach a market bottom. Despite the fact we've had a few blips in that, I still think we are getting very close to that. The projects that are fungible or deferrable have been deferred. But eventually, lease obligations are going to require people to either put up or be willing to drop it. And so we're optimistic here that if we are not close a bottom at the end of Q1 that we will see it sometime in Q2.

And Jim. If I could just add to that we are maintaining market share in the Gulf of Mexico, which is an important factor. In the actual product mix, the well complexity is changing. So these extreme deep wells are just not being executed upon. So the impact on an EBITDA basis has obviously taken effect.

Thank you. Our next question comes from Darren Gacicia with KLR Group.

When you talked a little bit about pricing in the last answer, when you think about how much equipment is probably kind of gone to the sidelines for you guys, is there an element of pricing that's required maybe to refurb or bring it back to be operable that you need to think about maybe getting pricing for that, in order to justify the returns and the expenditure to do that? What does that look like across your business lines, from that thought process?

In our product and service line, I don't think it is going to be as big of an issue as it's going to be for some of the more capital-intensive businesses, like the drilling units themselves. You are seeing a lot of coal stocking, a lot of stuff that's going to scrap. And then onshore, there's a lot of pressure pumping capacity that has been idled. And there's a real question as to how much of that will be brought back, and at what price they feel like they can bring it back. So there are certain things in the supply chain that I think are going to be a bit sticky, and are going to require some sustained higher prices to see those. But in our case, with the type of assets that we maintain, we are ready to go as soon as the market pops, both onshore as well as offshore in some of our more highly technical sort of assets.

Now, does that change and look different when you think about people, and maybe adding back headcount? How does that work? I'm assuming that's its own level of overhead, if you will, as well. Does that require -- in terms of the hiring, if the thing starts to pick up, whether it's the U.S. land, U.S. Gulf of Mexico or international? How do you think about that relative to rehiring?

Well, in some cases, in certain sectors, I think it will be even more sticky to get personnel back. In our case -- and I tried to address this in some of my closing comments as I was summarizing our cost actions -- one of the things we are trying to do in Frank's is to make sure that when we do right size our organization, we think about the skills, the competencies and the capabilities we're going to need for the ramp-up; and we either protect those or we figure out a way to keep those on a line so that they are available for ramp-up when that occurs. But like I said, I think in your more capital-intensive industries, pressure pumping in particular, and I think the drilling units themselves -- there has been a significant washout of human resources in those sectors. And it will be interesting to see how fast they can safely and reliably ramp up.

Thank you. Our next question comes from Georg Venturatos with Johnson Rice.

I was hoping maybe we could just get an update on where we stand in the jack-up market and how you see that market share growth evolving through '16. And then, additionally, I know last quarter you mentioned the opportunity to eventually reposition some assets and move some of those into the Middle East. Just wanted to get an update on where we stood there, and any other markets that may be apt to receive some assets from declining markets.

This is John Walker. So following up to the earlier question, the franchise and distribution network that we have in the Middle East is mature. We've been there for two decades. As far as the jack up market, we have a small market share in that market. We have a contract that will increase our market share significantly from a small base in Q3, going in for the remainder of the year. It's a multiservice contract. In the longer term, the value proposition and total cost of ownership about moving the assets from the Deepwater markets into more complex, challenging, jack up market is ongoing. Getting the opportunity is going to be several quarters before we penetrate, because we've got to wait for tendering cycles. We obviously have some contracts in place; the activity levels are slightly increasing, but it's not material enough that it's going to move the needle, as we say. So in the short term, our market penetration is around the onshore side of the business. But we do recognize that the jack up is much more long term for the franchise.

Yes; we've mentioned in previous quarters that when you think about the global jack up market, Frank's position there is about 10%. And when you think about our position in the Deepwater market, I think you can see that there's real opportunity there. And that market share was by design. When the Deepwater complex well market was popping, we wanted to put our resources and attention in serving that market. Clearly, that's our premium market. And so, by design, we had our focus there. And I think now we've got an opportunity to diversify our portfolio a little bit. There's tremendous potential there with holding a 10% market share. And it's going to take time, as John mentioned, in order to really grow that market share. But we're confident we can. And that's where we got our start as a company is in the offshore shelf business, so we know it quite well.

Great. And then a follow up here really on the M&A side. Just wanted to check with you guys, given the environment and certainly net cash balances growing. But I know previously, you had talked about a willingness to take that debt to EBITDA level to 2 times, implying a certain level of target opportunities on the M&A front. Has that changed at all? Is that still where you are sticking in terms of your willingness to lever the balance sheet?

Nothing has really changed in that respect. We continue to evaluate opportunities. And with the fact that, as Jeff mentioned, we have padded a little bit of cash to our balance sheet, we are in pretty good shape. We've got essentially no debt, and capacity to go out and finance an acquisition, if needed. That's all still intact.

Thank you. Our next question comes from Waqar Syed with Goldman Sachs.

In your international business, you mentioned that you had about 20% reduction in pricing in West Africa. Does the first quarter results already reflect fully that pricing reduction, or is there more to come in the subsequent quarters?

It's baked into the first quarter results. But the signaling of what's happening is activity driven in the second half of this year. There's going to be a material contraction in the West Africa market for the second half of the year, and that's driven by simple activity.

And then for in the first quarter, would you say maybe 80% of the revenues in international were offshore? Could you give some kind of breakdown?

Those numbers are generally right, but we don't actually give a breakdown of the off and onshore business.

Thank you. Our next question comes from Ian Macpherson with Simmons & Company.

Jeff, you called out the $13 million in overhead burden in the Gulf of Mexico margins in Q1. It just seems very outsized. Can you compare that to the historical, normal overhead burden that's in that number, and what you expect going forward as we try to think about normalized margins?

Sure. So just to clarify, the $13 million is really the corporate overhead for the whole company. So we put that in the U.S. services business. You should expect the number to be around $8 million to $10 million, going forward. That will trail down throughout the year. We've taken some SG&A actions in the first quarter. Those will start to bear results in late Q2, Q3.

Okay. That's helpful, thanks. I'm trying to get a little bit more help thinking about the decline in international, as West Africa gets down in the second half. If we were to think about sequentially H2 versus H1, could the revenues in international overall be down as much is 15% to 20%, do you think?

I don't know about probably closer to 15% than 20%.

Okay.

Thank you. Our next question comes from Joe Gibney with Capital One.

Just one quick modeling question, Jeff; just was curious if you could update us on the working capital side, DSO initiatives, where things stand here, coming out of 1Q.

Sure. It obviously gets more challenging if you look. We had some low-hanging fruit last year. You will probably recall that we probably generated around $80 million between inventory and accounts receivable and what we call incremental working capital, other than just the balance sheet being unwound as the volumes go down. We will continue to target a DSO reduction of probably around 10 days this year, coming out of Q4. And then, in addition to that, we are also starting to target some things around DPO as well. So we are rolling out some new initiatives on DPO, as well, that we think will be helpful. Inventory gets more challenging as we talk about the tubular sales falling off; the inventory number is going to be more challenging. So I think if you look at the areas where we will have improvement this year, you'll see the improvement in DSO probably around 10 days. And you will see an improvement in DPO as we roll out some new programs there.

Thank you. Our next question comes from Brad Handler with Jefferies.

Could I ask you please just to speak to the manufacturing overhang you mentioned in tubular? Perhaps I'm just not quite piecing some things together. But if there are some specific steps you wind up planning or taking relative to lowering that burden -- assuming you all continue to have to operate at a pretty low level in tubular for the foreseeable future -- are there some specific things on the manufacturing side that you can do?

Sure. I think the one thing that might be a little confusing that most folks might not recall is that this is not manufacturing actually related to tubular; this is manufacturing that actually supplies equipment to the whole Company. So just because the tubular volume goes down doesn't necessarily mean the manufacturing volume goes down. The manufacturing volume is a direct result of the entire franchise, if you will. And there's a certain amount that's just inherent in there to maintain a certain level of capacity to supply the entire franchise. So that's what we see in there, and that number runs anywhere from $3 million to $4 million, somewhere in that range. So as we see the tubular revenues down right now, that's going to make it challenging for us, the balance of the year, to really contribute meaningfully from that segment. If I peel out manufacturing and just look at tubular margins by themselves, they are around 15% to 20% margins, just tubular margins by themselves.

If I can just add to that around the manufacturing standpoint, from a service quality perspective, something that the Company has been known for decades around is the ability to develop bespoke, unique type products for unscheduled activity. And that's something that Jeff and I continue to talk about in making sure that we have a certain structure in manufacturing to allow us to continue with that service quality.

Fair enough. And maybe an unrelated follow-up, but just following up on Ian's question of a couple of questions ago, I'm just not sure I quite caught it. You mentioned international revenues, and then you mentioned something down 15%. And I just wasn't quite sure I heard the reference points. But that wasn't annual, was it? Perhaps it was second half/first half.

It was first-half/second half, was the question. And so I believe his question was 15% to 20%. So that's probably a fair number, in that range.

Thank you. We have no further questions at this time. I will now turn the call over to Gary Luquette for closing remarks.

Okay. Just thanks for the great questions. Thanks for your time and interest in Frank's. And with that, we will end today's call.