Welcome to the Q2 2020 Frank’s International Earnings Conference Call. My name is Adrien and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. [Operator Instructions] I will now turn the call over to Alison Greene. Ms. Alison Greene, you may begin.

Good morning and welcome to the Frank’s International Conference Call to discuss second quarter 2020 earnings. I am Alison Greene, Manager of Corporate Communications. Our speakers today as shown on Slide 2 of the earnings presentation are 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, Senior Vice President of Operations. A presentation has been posted on our website and we will refer to throughout this call. If you’d like to do this presentation, please go to the Investor section of our website at franksinternational.com. On today’s call, Mike will provide an overview of the second quarter and our ongoing response to the COVID-19 pandemic and reduced industry activities. Additionally, he will review technology highlights and our progress along our 2020 key initiatives. Melissa will then review the financial performance of the second quarter and provide additional review of our cost reduction progress. We will close with a question-and-answer session. Before we begin commenting on our second quarter 2020 results, there are a few legal items that we would 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 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 probable GAAP financial measures in the second quarter 2020 earnings release, which was issued by the company. I will now turn the call over to Mike.

Thank you, Alison. We appreciate everyone joining us for the call today. Turning now to Slide 4, as everyone already knows, the impact of COVID-19 has hit the oil and gas sector very hard and has been a major contributor to the decreased product demand in the market and the significant curtailment in industry activity and spending. Our Q2 results, as reported today, represent the first full quarter of COVID-19 impacting our results. We have seen a variety of responses from our customers. And in many cases the response has to do with how prevalent the COVID virus has been in their area of operation. Many of our customers are generally maintaining ongoing drilling programs with minor disruptions and delays. Other customers have had to shut down operations in certain jurisdictions due to logistical issues with travel or disease spread in their operations. We continue to see delays in new program start-ups particularly as it relates to exploration. While project delays and reduced rig activity in Q2 were substantial, we do see signs of both bottoming and flattening in early Q3, and we expect some additional improvements in Q4. That said, there remains a high degree of uncertainty around the duration of the pandemic-related shutdowns or delays. The time lines for demand recovery and return to more typical activity levels depend on a number of future developments, the timing of which cannot be predicted, such as the development of a safe, effective vaccine as well as improved treatment protocols. As I have said before, at Frank’s, we are laser-focused on those factors we can control such as our cost structure. Thanks to swift responsive actions across our organization, we’ve been able to preserve our strong financial position through a highly challenging period. Our ongoing cost reduction efforts have had significant…

Thank you, Mike. Referring to Slide 6, during the second quarter of 2020, we generated $86.1 million of revenue, which was down from both the previous quarter and the second quarter of 2019. This quarter’s decline was largely expected and related to a full quarter of COVID-19-associated drilling pauses and delays with certain of our geographies experiencing reductions in activity of greater than 80%. Our Q2 adjusted EBITDA totaled negative $1.7 million due to the associated activity declines across all segments. Our cost reduction measures, which Mike mentioned earlier, allowed us to hold decremental margins to 24% quarter-over-quarter. In examining our liquidity, the company produced $26.4 million in operating cash flows for the second quarter, a notable increase from the prior quarter due to cost-saving efforts materializing as well as fewer one-off expenditures and an increase in customer collections. As previously noted, beginning in April, we amplified our engagement with customers to reduce our outstanding receivables in addition to the ongoing implementation of our cost reduction initiatives. As of the end of June, the company had cash and cash equivalents of $193 million, an improvement of $22 million over the previous quarter. Our free cash flow improved to $16 million in comparison to the negative $32 million reported in Q1. The company had cash CapEx during Q2 of $10.3 million. This CapEx was mostly related to in-flight capital projects approved and initiated in 2018 and 2019, which were higher than expected. The company intends to keep newly initiated CapEx in 2020 to less than $10 million, and we are planning a total 2020 CapEx cash spend of less than $30 million as compared to $37 million in 2019. We anticipate seeing additional free cash flow benefits of our lower 2020 approved CapEx in 2021. Turning to Slide 7, our TRS…

Thank you. [Operator Instructions] And our first question comes from Taylor Zurcher from Tudor, Pickering, Holt. Your line is open.

Hey, good morning and thank you. My first question is on the cost-out programs you have been initiating. You have clearly made some good progress over the first half of the year. And I was wondering if you could help us think about the timeline of realization of some of those benefits over the back half of the year. It sounds like there is still more wood to chop relative to what you have achieved so far. And so one, how much more wood is there to chop on some of those programs and two, should we expect to see additional sequential benefit in Q3 and even in the Q4?

Thanks, Taylor, for the question and good morning. I think as it relates – this is to Melissa here. I think as it relates to the cost out program, a couple of things. So when we look at H1 year-over-year, we actually see that we are already a little bit above our $50 million run rate. So we would say that we have already kind of achieved the run rate we’re guiding to. That being said, why we feel like we can make incremental improvements is we’re also taking an in-flight in H2, we will actually be reinitiating kind of re-baselining. So we have communicated previously the PIP initiatives. We will be going back through those PIP initiatives, looking at essentially how much cost we have removed re-benchmarking all of the functional areas, and potentially, we believe, taking out sort of another layer of costs. So I don’t think we can get predictions on how much more come out but important parts are – we are already at the $50 million run rate. So we feel very confident in the $50 million for the whole year. And we think we can improve it because we’re essentially going back to do the reevaluation, which we think will yield some incrementally additional savings to be had. So I think those will probably be not as large as the first half of the year, but they will be incremental on top of the $50 million we’ve already guided to. And we’ve talked previously as well about the ERP implementation, which leads us to believe we could find another several million dollars of savings next year post that implementation as well.

Okay, great. Thanks for that. And my follow-up just sort of broader outlook question. And you talked about some stabilization in activity, at least in the next couple of months. What was some rigs starting back up in Q3, it really sounded like Q4 is probably the quarter where you might see some sequential growth. But I was wondering if you could help us think about which markets are driving that stabilization. I know in the prepared remarks, you said the Caribbean is 1 where a couple of rigs to get back to work, I assume Africas and other. But which markets in general are seeing the most utilization right now? And is it fair to assume under the current outlook, you might see some sequential revenue progression higher in Q4 if these contract start-ups follow the schedule you think they might right now?

Yes. Taylor, it’s Steve Russell here. I will answer this one. Yes. I mean, I think there’s still a lot of uncertainty out there, first of all, in the market place. Going around the various regions, Middle East and Asia Pacific has not been as affected other regions. And we see stability in that region going forward. Coming to Europe-Africa, Africa was actually our most affected region here in Q2. We have a number of programs that were forced to shut down because of ability to get people in and out of the country my around the contractors and the clients that affected us. We have started to see some of those go back to work here in early Q3, and we’re hopeful that they will continue to ramp up during Q3 and Q4, although there’s still a number of orders that are closed there. We have seen rigs go back to work already in the Caribbean, specifically in our Guyana operations. So those will back up to the activity levels they were pre COVID in Guyana. And there’s some other rigs in the Caribbean that we expect to pick up in Q4. The unknown to a certain extent here is what’s going to happen in U.S. Land. I think everybody sees the dropping rig counts in U.S. Land that’s stabilized. And there are some very sensitive discussions on clients starting to pick up some rigs in U.S. land. But I don’t see a big pickup in that market here in the near term. So overall, I think we are somewhere at or around bottom and we’re seeing a sort of tentative recovery here in – probably in Q4 realistically.

Yes. No, I think it’s – of course, it’s a slurry slope with two more months of the quarter ahead of the operators generally don’t give us a lot of notice if they’re going to change a program slowdown, pick up, stop, in fact, in some cases, we had operators say they were going to shut down a rig and then they changed their mind and vice versa. So it’s very hard to predict the future. But while we’re optimistic and we’re not giving guidance, but I think we’re at the bottom here. So hopefully, at least in the third quarter, we wouldn’t sink any further. So I think easy way to say it is, I think revenue for Q3, even though I wouldn’t call this guidance, it should be in the flattish range, up or down slightly, and it’s all going to depend on the operator’s decisions. Once again, as Steve said, Q4, we’re more optimistic that we’ll be heading in the north direction.

Okay. That’s very helpful. And I’ll squeeze one last one in. On free cash flow over the back half of the year has been the Q2 number solidly positive after a free cash flow burn in Q1. But as we think about the back half of the year, clearly, all the free cash flow that you generated in Q2 is from working capital. And as activity begins to stabilize, that working capital benefit is probably going to be much reduced moving forward and so just curious at a high level, if you could help us think through the free cash flow moving pieces over the back half of the year?

Yes, I will make the first comment on working capital. As you know, we have said this many times, we are working very hard to increase our customer collections and decrease our DSO. The business has contracted. So some of that tailwind is over we still have big opportunities to reduce our DSO. I have to admit, it’s very, very tough. These big operators, they always have a reason why they can’t pay you just yet, either arguing over what side of the paper is stapled on the invoice. They can be very picky. And – but we are doing our best and we’ve got several teams of people working on different aspects from invoicing to collection, being more proactive in terms of call when somebody was past due not waiting 30 days or even 15 days, but making sure people know immediately when they are past due. So we’ve got a big, big focus on receivable collections. Obviously, if we can start to get some EBITDA in the back half of the year that will help us as well. Melissa, do you want to pick up on that?

Yes, sure. So I think Mike said well, but taglines here are, we think there is some more to gain on under DSO, we were able to free up some collections. We will be going after more and improving DSO further in the back half of the year. We do have our tax benefit coming in the back half of the year, that will aid us as well. You heard me make mention of CapEx. We see that unwind happening in the back half of the year. So agreed we got the biggest piece probably of our working capital benefit here in Q2. The back half of the year will be a story of how much cost are we now seeing in terms of asking the PO unwind a reference we’re seeing less POs in the system, we think we’ll get several smaller tailwinds in the back half of the year, be able to optimize DSO further in the back half of the year. And we’re planning on squeezing out some positive free cash flow for the year if we can at all get there.

Yes, there are other ways – I would just say, free cash flow is great. We love it, but there are other ways in terms of selling excess assets, things of that nature. If you look back a year ago, our cash at Q2 ‘19 was $172 million. So we’re up $22 million over a 12-month period and what I’d call it’s been a pretty bad market. So congratulations to the team for looking under every rock for cash, and that’s an impressive cash build in terms of where we’ve been.

I agree and thanks for the response and I will turn it back.

Our next question comes from Ian McPherson from Simmons Energy.

Thanks. Good morning. Mike, the conversation has run a little bit counter to this but just given your advantaged balance sheet, certainly, it would feel to me like a buyer’s market for some good properties out there. Just given the market headwinds with regaining positive EBITDA with the portfolio in place, have you – are you looking more closely at acquisitions, either adjacent or a little bit more out of the box to the current footprint?

So we are open for acquisitions. We have not quit looking at ideas. It’s an interesting market. We talk to advisers, various bankers. And it’s harder to get deals done in this environment because how do you base – if it’s stock, how do you base exchange ratio or the stock value when everybody’s stock is so depressed. One counterparty may feel like their recovery is going to be much faster than another counterparty. So the environment in one sense is quite a bit tougher. But on the other, and you alluded to this, the other thing that we have going is a very, very strong balance sheet. So we are looking at transactions. Once again, the other side of that issue is it’s hard to do good deals. If you look at – over a long period of time, if you look at 100 deals, there may only be 5 that even rise to the level of going into due diligence. So we want to be very cautious on the one hand to make sure that any deal we do is very additive to our EBITDA and free cash flow, certainly through the first 12 months. So I’ve rambled a bit, but I think we can say we are actively looking at transactions, but they’re hard to do, to do a good one. So – but we are definitely actively spending some time looking at some things.

Got it. Thanks. I also wanted to ask you, just given the challenges that your largest competitor in offshore TRS has had with the balance sheet. We used to talk more frequently about your market share within the offshore but even deepwater TRS. I imagine it has accreted, and you mentioned that you have the two heaviest drill strings lower to date. So certainly, at the top of the market, it sounds like you’re hitting above your weight. But how do you think your market share has evolved? And where do you think it could head into the ramp of the recovery when that comes?

I will give you a very quick intro and then picture it to Steve, who is obviously closest in the organization to our various markets. In terms of – well, I will just turn over to Steve, I will just let you – I won’t lead it. I will just let Steve answer this way.

So yes, Ian, I mean, we’ve been tracking our offshore market share. And I mean, we’ve seen a gradual increase in market share here over the last couple of years. And one of the independent assessors out there of market share actually tagged us as 1 in the global TRS market in 2019. I mean, deepwater is very much a focal area for us. And we are picking up projects, although I continue to say the competitor we are talking about here continues to be a very worthy competitor and continues to chase business just as hard as we would expect them to here. We do have some asset availability as the markets drop. So that gives us the ability to go and deploy those assets as opportunities come up, and we take and fight those on a case-by-case basis.

Understood. Thanks. Thank you, Mike.

[Operator Instructions] And we have no further questions. I will turn the call back over to Mike Kearney for final comments.

Okay. Thank you. To conclude, while we are experiencing unusually poor operating conditions in the industry, you can rest assure the employees of Frank’s are doing everything possible to ensure safe operating conditions while delivering quality service to our customers. Additionally, as you’ve heard from the entire group here, we’re being extremely cost conscious. So we look forward to keeping everyone updated on our progress. And thanks for your continuing interest in Frank’s, and we’ll talk to you next quarter. Goodbye.

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.