Expro Group Holdings N.V. (XPRO) Q2 2019 Earnings Report, Transcript and Summary

Welcome to the Second Quarter 2019 Frank's International N.V. Earnings Conference Call. My name is Sylvia and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduict a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Erin Fazio. Erin you may begin.

Good morning and welcome to the Frank's International conference call to discuss second quarter 2019 earnings. I'm Erin Fazio, Director of Finance and Investor Relations. Turning to slide 2, as speakers on today's call we have Mike Kearney, Chairman President, and Chief Executive Officer; and Melissa Cougle, Senior Vice President and Chief Financial Officer. Joining Mike and Melissa for the Q&A portion of today's call will be Steve Russell, President of Tubular Running Services; Nigel Lakey, President of Tubulars; and Scott McCurdy, President of Cementing Equipment. A presentation has been posted on our website that we will refer to throughout this call. If you'd like to view this presentation, please go to the Investors section of our website at franksinternational.com. On today's call, Mike will take you through an overview of this quarter and certain technology highlights. Melissa will then review the financial performance of the quarter and we'll close with a question-and-answer session. Before we begin commenting on our second quarter 2019 results, there are a few legal items that we'd like to cover beginning on slide 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'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 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. 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 2019 earnings release which was issued by the company earlier today. I will now turn the call over to Mike.

Thank you, Erin. We appreciate everyone joining us today for the call. Frank's excellent second quarter results highlight our differentiated market position which has driven both top and bottom-line improvements. We are seeing increased customer spending in key markets and are continuing to experience growth through market share gains and improved pricing. The company's focus on customer service and developing industry-leading technology has been key to improving our financial results. Turning to slide 4 and the summary of our results, in the second quarter, we generated $156 million of revenue which was up 18% from the second quarter of 2018 and up 8% sequentially. Adjusted EBITDA was $17 million in Q2 and $27 million for the first half of the year, demonstrating a first half year-over-year incremental margin of 34%. In the second quarter, we generated positive free cash flow for the first time since the third quarter of 2017. We are dedicated to entering the market recoveries in a position to improve returns on capital and optimize free cash flow. Now, I'd like to review some of our segment and technology highlights in the quarter. Turning to slide 5, the TRS segment's second quarter revenue increased 16% from the prior year and 9% from the prior quarter. Increasing customer activity in key markets such as West Africa, the U.S. Gulf of Mexico, the Caribbean, and Asia-Pacific drove our top line improvement. It is also worth noting that the second quarter was the 12th consecutive quarter of growth in the U.S. land market for the TRS business. This was achieved despite the recent decline in rig counts. Our technology accomplishments in the TRS business were noteworthy this quarter. We were awarded the 2019 Hart’s E&P Meritorious Engineering Award in recognition of the TRS patented Collar Load Support System. This technology is the industry's only true non-marketing tubular handling system for corrosion-resistant alloys. It's a prime example of the company's relentless focus on safety, removing both our personnel and those of our customers from the red zone on the rig floor. With this technology operators can rack stands of tubing in the derrick while off the critical path. In addition to enabling safer operations, the Collar Load Support System substantially reduces run time, while simultaneously increasing well integrity and the life of the well. Another example of our technology creating value for customers is in Azerbaijan. While working with a major operator, Frank's deployed its Intelligent Connection Analyzed Make-up tool or iCAM. This technology is machine learning and big data analytics to learn from historical data and make recommendations for optimal make-up in connection integrity. Our iCAM system provides connection analysis more reliably, accurately, and with less personnel than any other systems available today. This job was performed with 100% accuracy in dispositioning over 2,500 connections significantly reducing the tubular installation time. Turning to slide 6, the Tubulars segment second quarter revenue improved more than 30% year-over-year and 20% sequentially. Recall this segment contains two businesses. The first is our tubular products sales business, which is large diameter conductor and surface casing and connectors. The second piece of this segment is drilling tools, which is designed to optimize drilling performance. The Tubular product sales business experienced strong growth in the second quarter due to higher demand in the U.S. Gulf of Mexico and a large tubular order from a customer in Mexico. Drilling tools revenue also increased sequentially due to increasing customer adoption of our product suite. The Drill String Torque Reducer or DSTR illustrates this and has been adopted as a solution of choice for several customers on degraded wells and reentry work. The DSTR also improves the integrity of the well under severe downhill conditions while reducing casing work. In the second quarter, the Tubulars segment also successfully completed field trials on two new technologies, the DPTR and the Data Logger. The Drill Pipe Torque Reducer or DPTR is a modular clamp-on tool similar to the DSTR and that it is also used in deviated wells that are experiencing excessive rotary torque and casing wear problems. And the Data Logger is a downhole drilling sensor package that allows data to be recorded throughout the drilling operation to document the effectiveness of shock absorption and vibration mitigation. The Data Logger represents additional functionality of our existing Harmonic Isolation Tool. While our drilling tool's business is a relatively small piece of the total Frank’s portfolio, our customer feedback is extremely positive and we expect this business to have a robust growth trajectory going forward. The Cementing Equipment segment as shown on slide 7 posted revenue of $27 million, an increase of 14% compared to the prior year and essentially flat compared to the prior quarter. International expansion efforts continue to progress with new work awarded in the quarter in the Black Sea, West Africa, Mexico and Asia Pacific. This progress may not be readily evident in our results as we had some international projects finished during Q2 with follow-on work pushed out later in the year. Given that this segment is still in the early stages of international expansion, we expect some lumpiness in the results as projects start and completion times fluctuate. A good example of the international traction in this segment is in the Caribbean market where our Cementing Equipment business has moved staff and products into a joint base with our TRS business. The Caribbean is one of our strongest markets and we feel this combined go-to-market approach will drive an improved sales effort. As you may recall, a significant part of the rationale of acquiring our Cementing Equipment business was to roll out their technologically superior products through the Frank's International footprint. It is taking longer than originally anticipated to tweak the tool designs for certain international markets and obtain the required international certifications. The good news is that all of that work is behind us and these industry-leading tools will be available in even more markets starting later this year, most notably the North Sea. Overall, our Cementing Equipment technology is expected to be utilized in over 20 international locations in 2019. Our SKYHOOK technology enhances the wireless cement head offering and it continues to enjoy strong adoption. It is now being utilized on almost every cement head job we perform in the Gulf of Mexico and has been utilized in six countries outside of the U.S. And SKYHOOK will be deployed into additional international markets over the remainder of the year. This technology has been recognized as the best practice by many of our customers, because it embodies our core value of safety due to its remote operation. SKYHOOK eliminates trips up into the derrick to connect cement lines by our employees or those of our customers. So on a company-wide basis, the market outlook for each of our businesses is positive for the second half of the year and we are encouraged by the relative stability of oil prices and improving deepwater rig counts. As we look to the remainder of 2019, our plan still calls for 15% year-over-year revenue growth and an approximate doubling of adjusted EBITDA. I would now like to introduce you to Melissa Cougle who joined the company as Chief Financial Officer two months ago. She brings over 17 years of oilfield service experience to Frank's most recently as CFO at NESR. Prior to NESR, she held several senior level finance and accounting leadership roles at Ensco. She has been a great addition to Frank's and will play a significant role in leading us to higher returns on capital and free cash flow generation. Melissa?

Thanks, Mike. It is an honor and pleasure to have joined the Frank's team. My first two months have been fruitful and immensely educational. And I had developed a newfound respect for the unique position Frank's occupies in our space and the committed workforce who're devoted to the Frank's vision. And looking at the quarter's financial results, we are reporting revenues this quarter of $156 million. Our top line has grown 8% since the last quarter and 18% since the year ago quarter driven by better-than-expected growth in our TRS offshore business as well as a large tubular product sales order completed during Q2. And looking at adjusted EBITDA, we finished the quarter reporting $17 million, which is up 78% sequentially. Our business is generating strong leverage from our top line growth. As a reminder in Q1, there was a one-time insurance charge of $2.5 million. And looking at our first half collectively, we are seeing incremental margins of 34% year-on-year, and feel good that this trend should continue and improve going forward. And turning to cash flow which is at the forefront of our minds and our investors mind we ended Q2 2019 with $173 million in cash and short-term investments which was flat to the first quarter of 2019. Our free cash flow generation totaled $3.3 million for the quarter, and this reflects our first quarter positive free cash flow since 2017. We are focused on managing working capital requirements through the remainder of the year, with a large focus on reducing our DSOs. We do expect to continue to generate free cash flow for the remainder of the year. We spent approximately $9 million on CapEx in the quarter, which continues to be in line with our expectations of approximately $40 million total spend for the year. Our investments are being made strategically on products and technologies that we believe reinforce our strong position in the market and where returns on capital make sense. Much of our capital for the year has been committed and we see cash generated in the back half of 2019 as devoted to paying for those expenditures as that equipment is received. And looking at our performance for each segment, our Tubular Running Services segment showed the strongest performance with revenue of $107 million, which was up 9% from the first quarter and 16% from the prior year quarter. Offshore markets in the Caribbean, Africa, and the U.S. Gulf of Mexico continue to improve for this segment. And we also picked-up additional market share in the Asia Pacific region. This segment is showing the strongest follow-through and incremental margins with adjusted EBITDA of $25.4 million in the second quarter. Lower manufacturing costs in the quarter aided the adjusted EBITDA performance in addition to the leverage on higher sales. We expect a range of 40% to 60% incremental margins in this segment going forward. And looking at – to our Tubulars segment. Revenues of $22 million were reported in the second quarter. This is up more than 30% from the year ago period and 20% from the first quarter of 2019. As a refresher in this segment, we have two different components: tubular products sales and drilling tools, which have very different margin profiles. Based on the mix profile of sales in any given period, the adjusted EBITDA margins will fluctuate. Adjusted EBITDA for the Tubulars segment was $3.9 million showing a slight decline over the prior quarter driven by the mix of higher tubular products sales. On a year-over-year basis adjusted EBITDA improved 18% and we feel this trend will continue in the back half of this year. We feel strongly that our investments in nurturing this business are paying-off as our drilling tools portfolio continues to have meaningful revenue contribution with good market penetration that we anticipate will accelerate in the second half of this year. Mike spoke earlier about our DPTR and DSTR and we are excited about the opportunity these tools in conjunction with the VERSAFLO technology bring. Our Cementing Equipment segment continues to see international expansion progress and good market penetration. The second quarter revenue of $26.7 million reflects a slight decline over the prior quarter of 3% with a year-over-year improvement of 14%. The sequential decline was primarily driven by the timing of projects internationally where certain projects were completed during the second quarter and follow-on work is expected to begin during Q3 or Q4. Partially offsetting this has been an uptick in downhole service tool work from the start of the Gulf of Mexico hurricane season as well as some increased cemented work in the well construction side. Adjusted EBITDA for this segment was $3 million this quarter, which reflects a 20% sequential reduction. A result of the existing project completion and new project delays occurring as well as some incremental indirect expenses that we have committed towards our international expansion efforts. Despite the lower performance this quarter by our Cementing Equipment segment, we continue to see green shoots of growth and new work has been awarded for this business in many jurisdictions. Mike also mentioned that the sheer presence of Cementing Equipment, operating alongside our TRS business in the Caribbean. We continue to be enthusiastic about the strategic fit of these projects and services in our portfolio and expect to see the results of our efforts in future quarters. The impact of our corporate component to adjusted EBITDA on the second quarter was approximately $15 million. In the second quarter, our expenses were slightly higher than anticipated, as we had some higher medical insurance expenses for our U.S. employee base and some incremental professional services fees. We expect the Corporate adjusted EBITDA impact to come down in future quarters. We continue to expect the full year 2019 financial results to show consolidated top line revenue growth of at least 15% and incremental adjusted EBITDA margins to be in the range of 30% to 50%. We remain optimistic about our ability to capture work during the offshore recovery and to execute that work with excellence. Total company Q3 revenues are expected to be modestly up sequentially as our international Cementing Equipment expansion continues. Adjusted EBITDA in Q3 is expected to be in line with the second quarter. During this coming quarter, we will begin our process of looking forward towards 2020 and we will update the market on our view after that time. With that, we will open the call to Q&A. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Sean Meakim from JPMorgan.

Thanks. Hi, good morning.

Good morning.

Good morning.

So maybe to start, I was hoping we could just talk about how you're seeing changes in competitive dynamics. So, picking first international offshore markets, many few of your competitors, one is going through a period of transition and so as the market's improving, how are you seeing changes in competitor behavior? And then maybe you could just contrast that in the U.S. where lots of small competitors, much more fragmented marketplace and a more challenging near-term outlook in terms of activity. Maybe just to get an update on competitive landscape will be helpful if you don't mind.

Sure. I'll take it off and then turn it over to some of our business unit presidents we've got here. In terms of the competitive profile, we are in a very competitive market and we have as you know on the TRS side one large competitor. But when you go into individual markets, there are usually a handful of smaller sometimes local competitors that can be quite good and strong competitors. So, the competitive landscape is still competitive. I think we have picked up market share selectively for a couple of reasons. One is we're really pushing our higher technology offering and secondly and this gets sort of the people plank of our strategy. We've invested a lot of money in sales training over the course of this year and I think we may be starting to see the beginning results of some of that training that we've had in our sales force. But I'll start by turning it over to Steve on the TRS side. Maybe you could give little more granular on the TRS competitive situation.

Yes. Thanks Mike. As Mike mentioned here, we do believe we've gained some market share on the international markets. We have some capacity and ability to deliver the projects as they come up and we think that's attractive for the clients. On the U.S. Land side, obviously, we've -- the market is seeing some headwinds coming. We've been growing in U.S. Land now for 12 consecutive quarters and we know we believe that's primarily a function of our quite wide footprint and our ability to redistribute resources as individual basis pickup and drop. The other thing we've seen as a trend here is the big IOCs coming into U.S. Land. We've seen that as an opportunity for us to pick up those clients. And again, we believe they've an interest in our technology portfolio in U.S. Land which differentiates us from some of the smaller competitors out there.

Yes. This is Scott McCurdy. I would say for the Cementing Equipment business, I think, we are a new entrant on the international offshore market. So, a lot of that is proving our technology and basically the value of our tools and as rig rates go up that value goes up because of the efficiency and then safety benefits. But one of the things I would say, I think we're changing the competitive dynamic because as we come into a country or an area and we work for new customer that customer operates in multiple different jurisdictions that were spreading and we're seeing good adoption of tools within a customer around the world. And so, that's been a very positive sign for us.

Yes. Thank you. This is Nigel Lakey. I want to echo everybody's comments, but I think Mike identified a principal issue here. We have better customer engagement than we've had in the past. We're able to get the voice of the customer, understand their challenges and to Scott's comments particularly, rig costs are now very, very much foremost in our customer's mind. So where we are improve in efficiency, where we provide some technology differentiation solve some customer's problems, I think that very much sets us apart from the other players in this business.

Thank you for that detail. I appreciate all the different perspectives. Mike, I was hoping you also just maybe drill in a little bit more into the opportunity set for TRS specifically in Latin America as we look maybe in the next year and the year beyond. I mean I think historically Brazil is a market you guys are focused on too much, just given pricing and margins have been more challenging in that market, but with IOCs potentially looking to ramp up activity next couple of years, the success that we've seen in Guyana's Suriname along with even the Mexican side and the Gulf looking better. Just maybe how you look at the broader Latin American opportunity set next couple of years? And how that could contrast with how you participated in Latin America historically?

Let me start with Brazil. Petrobras historically has of course been the significant player in Brazil. If you look at the rig data though and the forecast going out two or three years, you can see that Petrobras -- the rig forecast for Petrobras going down and for the IOC is going up and that's good news for us. Petrobras is very, very tough on its vendors price wise. And I think the -- on Petrobras though, we do have an opportunity to bring in some of our specialized tools to try to up-sell and kind of get into the Petrobras story of that way. On the IOCs, we work for them in many locations over the world so -- all over the world. So we've got a very good route to try to sell our story to the IOCs. They're ramping up in Brazil. Other parts of Latin America, the Caribbean is very strong for us and the Mexican side of the Gulf of Mexico is increasing also, but I'll turn it over to Steve if you want to provide little more color on Latin America.

Yeah Mike. I think the Caribbean market for us is being dominated by the growth in Guyana and the adjacent countries, where we've had a first-to-market advantage and that's been a good growth story for us. I think the story line on Mexico and Brazil both IOCs are accessing the deepwater market, which is a sweet spot for us. So we see them as opportunities going forward.

Thank you. I appreciate that feedback.

Our next question comes from Byron Pope from Tudor, Pickering, Holt.

Good morning and congratulations Melissa. I was just wondering Mike or Melissa realized the business is naturally lumpy from quarter-to-quarter, but as I think about the Q3 guidance results, it's slightly sequentially and implies top line and degradation in Q4. And so just wondering if you could provide some incremental color and context on whether that's just the timing of projects in one or more of the business segments and -- but again, any context there would be helpful.

Yeah. Good comments, Byron, very observant on your part. But if you take the straight 15% revenue growth and then you look at our first half, the implication is that our revenue is going to be, if you say flat in the third quarter, it definitely implies a fairly significant downward tick in the fourth quarter and that's really not our expectation. So when we say, 15% year-over-year revenue growth, that's really a bare bones of minimum. But I have to say, I'd be very disappointed if all we did was that, because that would target as the $600 million revenue for the year. So look at 15% is kind of a low watermark. It's not really our current expectation. So I don't know if that helps any, but we certainly think that the second half of the year revenue -- because we do have some projects kind of winding off in Q3, we depict that our kind of minimum would be flat revenue in the third quarter. Of course that would imply a pretty strong fourth quarter. So that's kind of the trajectory that I personally see is flattish third quarter and a pretty good bump up in the fourth quarter.

Yes. I…

That would get us over the 15% bogey so to speak.

In addition to what Mike says, maybe some additional color around the lumpiness. There's several things that can drive out top line, the tubular product sales and these tend to coincide with if you will customer delivery date. So where a customer pushes out a well even a month or two, if that trips the quarter that can move our top and bottom line pretty meaningfully in one of our segments. So when we look forward, we see additional growth trajectory in total for sure. And I think as we look at our what I'd say is our burgeoning market segment theme ,the Tubular segment as well as Cementing, when we look quarter-over-quarter we may see a project slip, and that could be meaningful impact to that segment in a particular quarter, but when we look overall at the landscape, we see a very good growth trajectory. So I might suggest that when we're looking at Tubulars and we're looking at Cementing, we're looking year-over-year and sequentially, but year-over-year and the total trajectory is very important. And then when we're looking more at TRS, we're looking more sequentially as to how we're continuing to move forward always up into the right to the TRS business.

That's really helpful. Thank you both. I’ll leave it at that.

Thanks, Byron.

[Operator Instructions] We have no further questions at this time. I'd like to turn the call over to Mike Kearney for closing remarks.

Thanks, Sylvia. So to conclude, we expect a solid second half of 2019 and have an optimistic outlook for the continued outflow recovery into 2020. We continue to evaluate ways to improve our operational and financial performance to drive higher returns on capital and free cash flow. We look forward to keeping everyone apprised on our next call. Thanks for your continued interest in Frank’s International.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.