Expro Group Holdings N.V. (XPRO) Q3 2020 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2020 Frank's International Earnings Conference Call. My name is Shelby, 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 Melissa Cougle. Melissa, you may begin.

Good morning and welcome to the Frank's International conference call to discuss our third quarter 2020 earnings. Our speakers today as shown on slide two of the earnings presentation are Mike Kearney, Chairman, President and Chief Executive Officer; and myself, Melissa Cougle, Senior Vice President and Chief Financial Officer. Joining us 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 Web site that we will refer to throughout this call. If you'd like to view this presentation, please go to the Investor section of our corporate Web site at franksinternational.com. On today's call, Mike will provide an overview of the third quarter and our ongoing response to the COVID-19 pandemic and our thoughts on fourth quarter activity. Additionally, he will review technology highlights and our progress towards achieving our 2020 key initiatives. I will then review the financial performance for the third quarter. We will close for the question-and-answer session. Before we begin commenting on our third quarter 2020 results, there are few legal items that we would like to cover beginning on slide three. First, remarks by company representatives may refer to or contain forward-looking statements. Such remarks are subject to risks and uncertainties that could cause actual results to differ materially from those expressed on slide by such statements. Such statements speak only as of today's date. 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 Web site, or on our Web site 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 third quarter 2020 earnings release which was issued by the company. I will now turn the call over to Mike.

Thank you, Melissa. We appreciate everyone joining us for the call today. Turning to slide four, our third quarter results continued to reflect the effects of the unprecedented industry downturn caused by the COVID-19 pandemic and lower commodity prices. Despite the challenging operating environment and customers spending reductions, I'm proud to report our organization continued to deliver high-quality products and services to our customers while maintaining our focus on reducing costs. Even though our consolidated revenue declined 2% sequentially, our profitability improved with adjusted EBITDA increasing primarily due to our cost-reduction efforts. Consolidated revenue in the third quarter benefited from strong results in our Tubular segment which partially offset drilling activity declines in our Tubular Running Services segment. Revenue in our Cementing Equipment segment was flat sequentially due to improvement in offshore activity, offset by continued weakness in U.S. land. As I briefly mentioned in my opening remarks, the COVID-19 virus continues to be a disrupting factor, and has hit the oil and gas industry hard. Our third quarter results represent the first sequential quarterly financial comparison in this new lower activity environment. As you know, our customer base expands the globe and each of the geographies in which we operate face differing degrees of COVID-related disruption. This means we're seeing a wide range of customer responses in terms of altered activity. Some customers continue to have reduced operations due to logistical limitations and border closings, while others are back to or nearly back to pre-COVID activity levels. Activity overall is increasing. So, this positions us well for an improving revenue backdrop in the fourth quarter. We see these trends continue into 2021, and believe next year will provide for stronger top line growth that will translate into significantly improved EBITDA and margins. At Frank's, we continue to be laser-focused on things within our control, such as our cost structure. When we talk of costs, the first of two big buckets would be support cost, which includes indirect cost of revenue and S/G&A. The second major category of costs are direct costs of revenue which are the operational costs associated with performing jobs, for instance, direct labor. We have realized reductions across both of these categories that are expected to be between $140 million and $150 million for this year. Cost savings we realized to-date helped us improve adjusted EBITDA in the third quarter. The company remains focused on improving our bottom-line every quarter, and continues to place a strong focus on incremental efficiencies that can be gained in 2021 after the implementation of our new ERP system. Despite the many challenges related to COVID-19, we continued to safely deliver our services with the same outstanding quality Frank's has been known for throughout its history. We are effectively deploying personnel, processes, and technology that result in efficient reliable operations that minimize non-productive time, and reduce customers' costs. During these challenging times, safety remains our number one priority, and our operational teams continue to ensure our employees are safe, and in a position to get the job done for our customers. I want to reiterate my many thanks to our employees for their hard work and dedication throughout this challenging year. Our employees have continued to relentlessly focus on our customers despite the many disruptions caused by the COVID-19 pandemic. Now, I would like to highlight some developments in our geographic operating regions. In our Asia-Pacific region, we experienced some COVID-related disruptions and the delay of certain exploration projects. We've not seen project cancellations, but some of the work is slipping to the right. We expect several TRS-related projects to begin in the fourth quarter with additional deep water activity to pick up in early 2021. In the Middle East our third quarter results were negatively affected by numerous border closings caused by COVID-19 to begin in the second quarter. Despite these disruptions, our largest market in that region has remained steady, and we expect increased activity levels in the fourth quarter and into 2021. We believe Europe and Africa regional activity bottomed in July, and we are forecasting improvements in Q4 as well as into 2021. As we mentioned last quarter, Africa has been one of the hardest hit regions due to COVID-19, which resulted in numerous border closings to prevent virus spread. The good news is that some rigs have now gone back to work with more to come back online later this year and early next year. Focusing on our North American offshore region, quarter-over-quarter activity levels were more stable and benefited from some tubular projects delivered during the third quarter. We also witnessed certain rigs returning to work in the Caribbean, which offset reduced activity in other areas. We are well-positioned for the expected rebound in activity in the Caribbean and offshore Mexico as we move into the fourth quarter. The U.S. onshore market continues to be the area hardest hit for us at Frank's. We have experienced a slight rebound in rig activity as we entered the fourth quarter, and we are expecting marginally better results going forward from this region. The timing and scale of a potential rebound remains unclear, but our strategy for our U.S. Land business has remained the same. We will continue to maintain our focus on cost control and like size our resources to keep an optimal geographic footprint without consuming cash. We are efficiently managing this business through the down cycle while preserving our ability to flex our operation back up as the market improves. Frank's continues to demonstrate its commitment to develop technologies and reduce operational cost, increase reliability, and improve overall safety. I would like to point out a notable operational accomplishment that recently generated a great deal of value for one of our key customers. Our operational team recently deployed a slip system specifically designed to address the harass conditions of deep water drilling of operations in the Caribbean. The operator was experiencing increased frequency and severity of maintenance on existing slip systems which resulted in increased time to trip drill pipe. The unique design of the slip systems developed by Frank's allows drilling operations to continue for extended periods of time without the need for maintenance staff and provide for increased tripping speed. The extended and more efficient pipe trips with fewer maintenance staff resulted in reduced cost and improvements in safety. Both of which were recognized by the operator. During the third quarter, we successfully deployed several of our newer technologies. Our CENTRI-FI control system achieved another successful deployment for a major operator in the Gulf of Mexico. This technology reduces cost and improves safety by consolidating control functions from multiple consoles into a single user friendly tablet interface. This results in reduction in both equipment and rig floor personnel. This multi-machine control and remote viewing capabilities provide for a much safer rig environment. Another tool we recently introduced is our Data Logger drilling dynamics measurement tool which has seen great results in both the Permian Basin and the North Sea. The Data Logger is a compact digital device that is easily integrated into the drill string and measures potentially harmful phenomenon such as shock to the drill string and bottom hole assembly components. The valuable information gathered from the Data Logger allows customers to make better informed decisions resulting in improvements in drilling performance, as well as reducing the energy and time required to construct a well. Frank's was also honored to have three technologies selected as 2020 World Oil finalists, which include our SKYHOOK Wireless Cement Make-up Device, iCAM, Connection Analyzed Make-up System, and our BRUTE-FORCE Integral Circulating Valve. The SKYHOOK took home the award for the best health, safety, environment, sustainable development in the offshore category. This is an award that Frank's has now won two years in a row. We're all extremely proud of our development and technology teams for these very prestigious achievements within our industry. Finally, as seen on slide five, I would like to highlight our progress towards achieving our 2020 initiatives of protecting the balance sheet, reducing our cost base, rationalizing capital expenditures, and maximizing free cash flow. We continue to place a tremendous emphasis on fortifying our already strong balance sheet, and maximizing our liquidity position. Our performance in the third quarter once again demonstrated our success in putting these initiatives into action. We continued our substantial progress on permanently optimizing the support cost structure of our business, and are now estimating support savings of $60 million, double our original 2020 target of $30 million communicated one year ago. In addition, our targeted efforts to improve working capital management and instill capital spending discipline have been successful. Our strong balance sheet and enhanced liquidity position will enable Frank's to navigate today's challenging environment and will position the company to take advantage of opportunities as the market improves. Now, I'll turn the call over to Melissa Cougle, our Chief Financial Officer who will discuss our financial results.

Thank you, Mike. Referring to slide six, during the third quarter of 2020, we generated $84.4 million of revenue, which was down 2% sequentially and 40% year-over-year. Third quarter revenue benefited from strong performance in our Tubular segment which partially offset declines in our Tubular Running Services segment related to the full quarter effect of drilling program changes that began during the second quarter. Our third quarter adjusted EBITDA totaled negative $1 million, an improvement compared to the second quarter of 2020. Our cost reduction measures which Mike elaborated on earlier helped us to improve profitability from the prior quarter despite marginally lower revenues. Taking a closer look at liquidity, the company produced $21.2 million in operating cash flow in the third quarter. We were able to enhance free cash flow generation with strong working capital management that included select U.S. tax refunds, additional cost reductions, and further controlling capital spend. As we discussed last quarter, we amplified our engagement with customers to reduce our outstanding receivables, which results in an 18% reduction in Days Sales Outstanding. As of the end of the third quarter, the company had cash and cash equivalent of $206 million, an improvement of $13 million over the second quarter. The company has placed significant focus through the past six months on improving free cash flow, resulting in $15.7 million of free cash flow generation this quarter. The company had cash CapEx during the third quarter of $5.5 million compared to $10.3 million in the second quarter. The company intends to maintain a strong focus on limiting capital expenditures going forward during this period of uncertainty. Turning to slide seven, our TRS revenue totaled $52.9 million, generating $1 million in adjusted EBITDA during the third quarter. Our TRS segment was negatively affected by the full quarter impact of drilling activity decline which resulted in declining revenue both sequentially and year-on-year. Reduced customer spending was universal across all our operating basins. Although we have recently seen drilling activity levels stabilize and noted certain rigs recommencing work in the Caribbean, which is benefiting our North American offshore operations. In the Tubular segment, as presented on slide eight, third quarter revenue totaled $16.5 million, an increase of 90% sequentially, and 32% year-over-year. The increase in revenue was primarily due to strong tubular product sales, including deliveries to customers operating internationally, and in the Gulf of Mexico. Segment-adjusted EBITDA totaled $1.8 million, generating segment-incremental margin of 14%. Concluding the segments on slide nine, our Cementing Equipment Segment revenue for the third quarter totaled $15 million which was flat sequentially, and down year-over-year. The year-over-year decline was mainly driven by reduced customer activity levels in both U.S. Land and U.S. Offshore markets. During the third quarter, we experienced sequential improvement in offshore cementing activity, which was primarily offset by continued weakness in U.S. Land. Our international growth in this segment is still on track to exceed 30% year-over-year, and has offset some of the domestic activity declines. Segment-adjusted EBITDA totaled $3.4 million in the third quarter, increasing sequentially, and 13% year-over-year. Turning to slide 10, we continue to make progress towards achieving the profit improvement actions we began during the fourth quarter of 2019 and expanded this year. We are now confident in our ability to achieve reductions in both operational and support costs that will exceed our 25% year-over-year. Specifically, and as Mike mentioned, our indirect support cost savings, including both cost of revenue and SG&A, is expected to be approximately $60 million when compared against 2019 levels. SG&A levels have been nearly halved over the past 18 months. All combined, our total year-over-year cost reductions are anticipated to be between $140 million and $150 million. And looking forward, we believe that activity levels troughed during the third quarter, and we do not see signs of further weakening in the markets. As Mike previously mentioned, we have already witnessed some rigs go back to work, which certainly bodes well for gradually increasing activity levels through the fourth quarter. In addition, we have clear visibility that certain major projects will commence, that were previously delayed, providing added momentum as we move into the first-half of 2021. Admittedly market conditions remain challenged, and the COVID-19 situation remains tenuous at best. With that said, we will continue our unrelenting focus on creating incremental efficiencies across our business, and maintaining our strong balance sheet and liquidity position. We are still evaluating 2021 financial expectations, but we do feel strongly that it will provide for significantly stronger financial results year-over-year, and we will be prepared to speak in further detail on future earnings calls. With that, I will turn the call back over to Mike for a few closing comments before we open up the line for Q&A.

Thank you, Melissa. Before we close out today's call, I would like to reiterate a few key points. First, we have one of the strongest balance sheets in all of oil services that will continue to help our organization navigate these challenging market conditions. It also places us in an enviable position to be able to react when opportunities arise. Second, we have increased our projected reduction targets every quarter for the past year, thanks to the diligent efforts of our teams. This provides a strong tailwind for profitability in 2021. Third, we continue to maintain a disciplined approach to capital spending that will allow us to further enhance our formidable liquidity position. We are spending in areas that we feel are needle-movers for Frank's in the future, and being highly selective about the opportunities we pursue. Finally, the combination of our cost control achievements, disciplined capital spending, and the strengthening market trajectory places Frank's in a strong position for an improved fourth quarter, which we believe will carry over into 2021. With that, operator, we are now ready to open the line for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Taylor Zurcher from Tudor, Pickering.

Hi, good morning, and thank you, Mike, Melissa, you provided some helpful outlook commentary by region in the prepared remarks, and frankly, it sounds like almost every region you operate in today is, if not bottoming, certainly improving into Q4, and so I'm curious, as we look at Q4, if you'd be willing to help us think about the magnitude of the sequential improvement at least on the top line you're seeing, and more of a high level follow-up to that, as revenue starts to trend back higher into Q4 and certainly into 2021, what sort of incremental margins on that revenue growth do you expect to achieve maybe relative to historical norms for the business?

Thanks, Taylor, for calling in. In terms of Q4 revenue, we're certainly good signals from some of our customers in terms of resuming projects or even starting a few new projects. Once again, in the short-term, we have almost zero impact on what our customers do in terms of their business which relates to our revenue generation. So we're seeing a number of optimistic signs, but it's frankly very hard to quantify. We have our own internal forecast, and it looks like we'll definitely see an uptick in revenue, but I think it would be a slippery slope to try to put a percentage or even a range on that. So I wish I could help you out, but we're sitting here talking to our customers every day, and they still have flexibility in their plans as well. So it's hard to pin it down exactly, but we're pretty optimistic about Q4 and we're hearing good solid things from our customers. Melissa, Steve, if you want to comment further or on the incremental margins?

Yes, maybe let me comment first. I think we've seen some rigs going back to work in both Africa and the Caribbean, which are important markets for us. So we have line of sight to some pickup there, and again, in U.S. Land, we've seen a bottoming out of the rig count there in mid August, and since then we've seen a small rebound, and that's going to help us a bit as we go into Q4 as well. So I think I'll let Melissa take the one on incremental margin.

Yes, so Taylor, thank you for the questions. On the incremental margin, you've seen our historical margins. We've typically got it off 35% to 50%, maybe even 55%. I think we'll be looking, and you've seen us talk this year about the decrementals and being able to keep them quite low. I think as we look to regain some traction and top line we're going to look to fall through to the maximum extent possible. We think that that's probable. So we're going to look to achieve the high end of that range as we look forward.

Understood, thanks for that, and from a regional perspective, you talked in that response about some rigs going back to work in Africa. I know 2021 is still a little bit a ways away, but it feels like Brazil and the Caribbean region in general are probably the two primary bright spots for 2021. Given your exposure to the deepwater Gulf of Mexico, both on the U.S. side obviously, and then growing on the Mexico side. Could you help us think about how we should be thinking about that region or activity in that region for you guys as we turn the page to 2021?

Yes, I think in the U.S. Gulf, we're still talking to our clients, and they're still going through their budget cycles, but in general I wouldn't see a huge growth in the U.S. side of the Gulf of Mexico next year. The more bullish market is probably on the Mexican side here, where there's been sort of a notable uptick in activity here last year, and we participated in that, and we see solid activity for next year on the Mexican side, yes. We report that whole region in -- or we view that whole region as part of North America Offshore, which also includes the Caribbean, and that market continues to be very robust for us, both in Trinidad and Guyana, and the opening market in Suriname.

And to Brazil, maybe rounding that out, we are looking at, so all the regions Steve just spoke to, I think we're seeing -- we've seen resilience. We continue to see resilience. We're looking at some paced growth, is what I would say, next year. Brazil is actually -- we have several rigs and programs going on there. If you want to speak to that as well?

Yes, I mean I think as you know, that the Brazilian market has opened up to IOCs being able to participate in the deepwater market, so several of them are starting programs next year, which will include our services. So we're looking forward to a ramp up in Brazil in 2021.

Got it. Well, that's encouraging. I'll turn it back. Thank you.

No further questions at this time.

Okay, well, thank you, operator. So despite the challenging market conditions we faced in the third quarter, our operational teams executive very well, and as an organization we continue to exhibit strong cost discipline. As always, we will continue to stay focused on ensuring safe operations, and delivering the excellent service quality and technologically advanced products to our customers. We look forward to updating you on our progress and performance on our fourth quarter call, in February. Thanks to everyone on the call, and for your continued interest in Frank's. Goodbye.

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