Q3 2019 Earnings Call
Hello, and welcome to today's Carbo ceramics incorporated third quarter 2019 earnings conference call. All participants will be in listen only mode. So you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to actually question. You May Press Star then one on your telephone.
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Expenses or profits.
These matters involve risks and uncertainties that could cause actual results to differ materially from our forward looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed on the company's press release on public filings.
Our comments today are also including non-GAAP financial measures. These non-GAAP measures include EBITDA, and adjusted EBITDA, and our and our and or not substitute for GAAP measures. It may not be comparable to similar measures up that other companies a reconciliation of net loss to EBIT on adjusted EBITDA as discussed on this call is presented in the companies.
Earnings release, which is available on its website. Your host for today's call is Mr., Gary calls that President and Chief Executive Officer of Carbo ceramics incorporated Mr. Cole said please begin your call.
Good morning, everyone.
The third quarter was challenging for carbo like many companies are the American oil and getting North American oil and gas industry.
All of our business is associated with U.S. onshore oil and gas are feeling the impact from the deterioration in activity.
We were also notified after the quarter ended that our largest prep same client intends to discontinue purchases a frac sand under our current contract.
We're in discussions with this client to determine if there's an agreeable alternative to this matter.
This contract covered significant fixed cost associated with our distribution facility and railcar leases.
Our immediate focus is to find a solution to these and other fixed costs that are burdening the business today.
Given these market conditions, including expectations for these headwinds to persist going forward, we continue to be laser focused on initiatives to preserve and improve our cash position.
By protecting the balance sheet. We believe we can continue the execution of our transformation strategy to diversify and growing profitable businesses outside the oil field.
Nor to accomplish this goal wheel folks on the following.
Asset dispositions inventory reductions significant cost reductions.
Increasing our existing cash generation businesses and potential modifications to our capital structure, including the refinancing of our existing debt.
With support from our board of Directors management doesn't gauge financial advisors to assist with certain of the company's liquidity enhancing initiatives.
Several potential dispositions are currently being evaluated and if consummated would improve our net debt position.
Well nothing is finalized yet if we execute all that are being contemplated they it could range between 20 and $40 million.
[noise] further operational cost reductions will be softer negotiations with our suppliers unless source.
If these negotiations are successful it should make a significant improvement our cash outlays in 2020 and beyond.
On the M&A front, we're targeting yesterday reductions of at least 20% in 2020.
[noise], we're focusing our energies on increasing our existing cash generating business, both domestically and internationally.
Well managing through this lower activity environment.
Outside the U.S. onshore oilfield markets were better reservoir rock exists.
Oil and gas sales are faring, well as evidenced by an approximate 27% increase year to date.
In our international oilfield revenues.
Unfortunately, this increase internationally, it's not enough to offset the decreases we're seeing and us onshore oil field sales.
Given that significant challenges exist across the oilfield chemistry, we plan to continue building a diversified company that is less dependent on the oil and gas industry.
One that's based on our four key strengths.
Terry will science manufacturing technology solutions, and the customer experience.
We are aggressively taken steps to expand into product platforms that leverage these critical strengths as part of our transformation strategy.
The industries, we are targeting our large and we believe that our existing manufacturing capacity and product development capabilities will facilitate growth in these markets.
We are aggressively focused on certain business, which are not only our higher margin contributors, but should help drive our future growth and free cash production.
In particular to businesses.
Industrial ceramic and contract manufacturing of industrial products.
I should note that we include agricultural products within the contract manufacturing business.
In industrial ceramic we continue to look for opportunities to grow our geographic reach and expand our product offerings.
We exit we expect our product marketing agreement at initial investment in date caught to contribute to an increase in our overall industrial ceramic business increased by 20% in 2020.
In contract manufacturing the opportunities for 2020 lead us to believe we will have substantial growth.
We have had many client request regarding the agricultural industry.
The technology, the agriculture industry is investing in and developing fits our company's strengths well and provides a solid foundation to build upon.
As previously announced we signed a production agreement within of our AG to produce an enhanced efficiency fertilizer product.
We believe these E favorite cultural technologies are needed to address future global food demand and the environmental impact from inefficient fertilizers being used today.
This represents another building block in our transformation strategy to redefine carbo.
Our oilfield technology ceramic software consulting and asset guard offerings.
We will make up the areas within the oilfield industry, where we maintained a continued focus and the differentiation.
Base ceramic and Frac sand will likely only be pursued were conventional rock as being exploited.
Or if the economics for carbo yield cash return worth pursuing.
We're by no means giving up on our oilfield routes.
But for the long term benefit of Carbo, we have to develop more of our revenue generation outside this industry.
We are currently undergoing complete strategic review of our businesses to ensure we're positioning ourselves for success as we navigate the challenges associated with oil and gas markets.
With respect to the fourth quarter, we expect revenues to be down approximately 30%, primarily driven by a decline in sand revenues.
However, we do anticipate both industrial and contract manufacturing revenues to increase sequentially.
Ultimately, we are seeking to create a balanced end market company portfolio that can minimize the extreme volatility witnessed in the oil and gas industry.
Acquisition targets are currently being evaluated with a focus on companies that have an established technology based product portfolio.
Our currently generating positive EBITDA with a solid runway for future growth and can leverage and increased utilization of our existing manufacturing assets.
Transformation is never easy, but we will continue to execute with energy reduce costs wherever we can and diversify outside the oil and gas industry.
We look forward to delivering these updates as the unfolds and with that I'll turn it over for questions.
Thank you, we'll now begin the question and answer session to place yourself into the question Q. Please press Star then one touchtone phone.
Using a speakerphone please pick up your handset and then press star one to withdraw your question. Please press star too.
Caused momentarily to assemble roster.
And our first question will come from John Watson of Simmons Energy. Please go ahead.
Thank you good morning, good morning.
Hey, Gary can you help us think about the cost or margin impacts from idling, you're seeing an operations in Q4.
Yes. This do you want to take that from an annual basis, yes, John from an annual standpoint.
Yes, so the cast cost analysis. When you include the entire supply chain, we're looking at something between eight and $10 million of of cash impact.
Pretty hefty.
Okay. That's helpful. Thank you.
Yes, GNS guidance for 2020 was encouraging Gary Q or Anastoclip wanted you elaborate on the specific initiatives you're looking at can meet that goal.
Sure John So.
Obviously, well, it's not our preferred approach we're looking at.
It has implemented some reductions in force beyond just headcount we are looking at any discretionary spend and eliminating that unfortunately, we do have fixed costs within SGN a to support the organization, but we won't leave any stone unturned as far as.
Where the reductions may come from I think were pretty darn confident in that.
8% number.
Okay. Okay understood in I would assume that you're able to reduce costs in simultaneously go forward with your industrial and agricultural growth is that fair that's a fair statement.
Okay.
Great. Thanks for the color I'll turn it back.
Again, if you have a question. Please press Star then one on your Touchtone phone.
Question will come from Bill does element of Titan Capital Management. Please go ahead.
Thank you I had a few questions relative to our.
Would you please discuss the financial impact of.
That relationship and separately, if you were to be able to do 500000 tons within with them what would that mean to to you all.
Well 500000 tons would mean quite a bit.
I think we'll disclose what our dollars per tonne fee would be for.
Manufacturing yet but.
If you did 500000 tons would be significant amount of money.
And.
Any time Bill we utilize those plants that have cash strains on us. It makes a material difference you know the amount of.
Paul through we see is really incredible.
To characterize what it is it goes beyond them, we have a lot of people that are inquiring about our ability to manufacture agricultural products.
Within a var, we really see there.
Kind of leading edge on a lot of the technology there.
So with them and others.
It's quite interesting what's happened in the industry on the our strengths are the plants and of course, the ability to develop those products quickly and manufacture them.
I don't know if I want to characterize what.
What the range of revenue would be within Obarr, but.
If you're talking those type of levels, which could very well happened because the industry is so big.
It would be very significant for us and I would characterize just our contract manufacturing overall, because we work.
This isn't our first contract with agriculture clients. There's another one that has some terrific technology that we've been working for.
Just overall contract manufacturing.
Growth, we expect next year will be very large.
And we also throw into that of course, the processing of minerals and other things some.
We've got we've put a team in place a couple of years ago, and I think we're now really starting to see.
The opportunities.
Getting close to fruition.
And I think we're moving in the right industries to get to high volume growth.
So what is vars size relative to set or other egg companies that you were either currently working with or is that you're in discussions working with a large player or as a smaller.
I would characterize it as being a significant international player and just entering the us.
And on there.
Well I guess the information they provide they say they have to southern locations that are producing.
This product are you are you doing both are you both of those locations that you're referencing.
Initially will probably be mechanism that one of our locations and.
As that goes on another products are developed we might move into the second location, but yes. We are we are working with them and.
You know you look at a geographically where's the high volume, where our assets setting all that stuff and.
It makes a lot of sense to be where we're up.
And Gary you you did say that 500000 tons would mean a lot to you. They did reference that thats kind of what they intend to be producing will that be split between you and another.
Another contract manufacture or is this an exclusive however, much they sell you'll be producing.
I think theres certain exclusivity to exist in there I don't think we want to make all the public and.
We haven't said that figure before I guess, they must have to you or something but anyway. We it's a great working relationship and we're excited about it.
We can grow together.
And it's just you really need to watch the macros thats happening and what the fertilizer market and why it needs to change.
And the the environmental side of that is enormous plus of course, just the yield side of it.
It's nice that they've already had success internationally. So you got some proof points out there already now your entrance into the US just allows you to expand quickly.
Okay and I do have one final question is there anything.
Specific to the type of fertilizer that they are producing is that.
Is more conducive to you were extended release ceramic technology or.
Just be used for ammonium sulfate.
Or any other.
Fertilizer that is that is used in a in a granular form.
Well, what we provide is the.
We're really good.
Forming pellets, let's say, we're really good it didnt fusing chemicals were really good coating.
We are really good a distribution all those things so any and all things they bring to us there's a great likelihood that we can produce and theres. Other people that are bringing different products to us.
We like contract manufacturing, we liked producing great products for them and I think what these companies find.
As our manufacturing scale and the the way our people worked with them to quickly solve problems and develop these products is very unique so that the team of ours is really performing well the plants in the group that's growing contract manufacturing.
So we welcome all of it then yes, I don't want to get into particular products, because some of thats little bit proprietary of the way we're dealing with each one of these clients.
Thank you.
You bet.
Again.
I would like to ask the question. Please press Star then one.
Okay.
Next question will come from Harold Weber of Ages capital. Please go ahead.
Hi, guys could you could you expand a little bit on the.
No on energy markets that youre, expanding within new products and the size of those markets.
The non what sort of non energy non energy.
I'll be in particular industrial ceramic I think we put out before that that one deals with.
Hundreds of millions of dollars.
You know in that one we bend the presence for couple of decades in foundry and grinding our investments in two new product development, our invest an investment into date caught.
Really expands our grinding portfolio. So those really I would characterize and hundreds of millions of type of market.
The fertilizer market I mean, you could probably look at public data, but that is extremely large and obviously.
Well over 100 million, you're probably up and it might have a b. After it when you get all these things figured out now that's on a global basis. It would be in billions US is obviously, a very large agricultural producer.
And I think they're going to lead the way with technology.
And the adoption of environmentally sensitive fertilizers.
So very large markets.
We also don't dismissed.
Our ability because our contract manufacturing is pretty all encompassing so our processing averse minerals whoever wants to bring whatever minerals. There were we welcome with open arms.
And.
We really like in particular.
The agricultural clients come forth. They all are unique and have unique technologies.
I think they've got a great future in front of them.
So what's it going and take for us to increase our market share within these categories.
Happening as we speak.
The industrial ceramics, just to characterize it little bit.
If we go to the bottom.
Of whatever oilfield kind of 2016.
Our industrial ceramics is growing 100% from 2016 to 2019.
We fully expected to grow another 100% in the next three year period or greater.
When we look at contract manufacturing, we really just kind of put our group together in 2017, and so we've seen steady growth in that 2017, 29 thing, but we expect very large growth in 2020 and moving forward.
As people get comfortable with our skill set.
As we define these big markets that we're going to go into.
And once again, we're just trying to produce great products for companies that Gupte big markets and great technology.
Okay could you also expand principally on what type of potential.
Asset divestments considering.
Well.
No. We we've certainly got so.
An abundance of big assets plants in particular.
So we've had inbound calls on those from pub inbound calls on other assets that we have we working through that.
And we've obviously engaged.
Financial consultant to look a bit with us as well I should probably also add on just the cash generation side, we still have a lot of inventory that we built up for the oil field that we we still plan on liquidating as we go into 2020.
We really are passed model building inventory uninhabited out there and you know people using that when they use it you can't live within that anymore. So our business model be was such that if you ordered you really need to.
Hey, Fortune relatively short time period on the oilfield.
So.
I don't want to go in much more detail on the assets, but we certainly have a lot of inbound calls.
Would you reasonable to say that sometime over the coming quarters, you'll be some.
Movement into space point.
Come on I think scenarios of what you will or won't be doing.
I think it's reasonable.
Speculation goes that here prior to the next call there'll be some actions taken.
And we will report on them accordingly.
Thank you.
Our next question will come from Eric Castro Scholtes family Office. Please go ahead.
Hi, guys. Thanks for taking my question.
Morning.
Just to clarify the eight to 10 million that you referenced was that a quarterly number or an annual number for the same but.
Yes, Thats, an annual cash cost number.
Okay. We're we're taking action as noted in our filings.
To to idle the facility, it's more associated with.
The the supply chain within that that we developed within that contract.
Distribution center railcars those types of things.
And in terms of immediate onetime costs like for severance or anything could you disclose that.
It it's going to be relatively small.
At this point.
So I don't know that.
It's going to move the needle necessary the bigger item or they are the lease facilities in the lease railcars right.
Okay.
The.
On the prior conference call you mentioned, one another opportunity to contract manufacturing opportunity in the fourth quarter can you comment on how that's progressing.
There is.
Dave or what that one months stope lows.
The so we had we have.
Several contract manufacturing opportunities.
At least two of which.
We have been ongoing since last quarter, we feel pretty confident we obviously, we announced the univar.
Matter or opportunity here last week, we have several more that we're in negotiations on within the agricultural space.
And we have one sort of in the minerals processing space that is still in negotiation that carried over from last quarter.
We don't have an update on that at this point.
I think they all the why don't know if we would call field trials or product trials most of our product trials have worked out pretty well.
Which gives us a lot of confidence as we move forward there for 2020.
Okay and can you give us a update on Pik Onyx, how thats progressing.
Well, we we certainly produced the product on small scale the product is out with some clients.
I'll pick qponix.
Simon now is to go out and gather capital for further investments. So we can.
Really move into commercial type of production levels. So.
We've done our part and I think the product is still.
I'm going to be a great product and our team down there at one of our plans really did a good job. So now were little bit waiting on them.
Okay.
And then one more more can you give us an update on.
The Orcel technology ceramic outlook for 2000, just wondering on might be early but.
No.
Earlier in near you mentioned.
Yes, Scott Exco offshore might be up 20% in 2020 I was just curious what your updated years on that.
Yes, I think.
We will have.
We got some big jobs out there for these things can move around a lot we.
Our oldest one was cup years go move to full year on it.
And we've seen one recently moved that we thought was going to be in 2019.
Now, we kind of think it'll be a 2020.
Job.
And I would say we're seeing.
Good adoption of not only.
KRYPTOSPHERE HD, but now we've introduced KRYPTOSPHERE XT and we've got LD and all that stuff. So I think thats. Good I think internationally, we've seen more interest in.
Some of the KRYPTOSPHERE products on the SCALEGUARD some of those things I think.
We're probably.
I feel good about everything where there was good rock so.
Alaska Gulf of Mexico, and most of the international World, where there's low quality rock either us onshore everybody is going through the pain.
And I think the industry is starting to realize that we've been saying up for some time, but.
So I think will.
We hope to see a better year next year actually in the oilfield technology ceramic by that I mean higher revenue.
Yes.
All right. Thank you for the question and answer you bet.
This concludes our earnings call I'd like to turn the conference back over to Mr. coal staff for any closing remarks. Please go ahead Sir.
Well. Thank you all for joining us. This morning, I'm just going to talk about a couple of key points you know on the challenges side I think it's really clear you know the us onshore oilfield markets very tough.
The low quality reservoir rock combined with low oil and gas commodity prices resulted in little or no returns for the industry.
And that means activity pricing and the use of technology products is likely lower.
So therefore, we have to reduce the legacy costs of what was once a big business for us He base ceramic.
And also Sam now.
In particular, the cost distribution assets, which includes railcar leases and distribution facility leases, we have to lower those.
We're also reducing the Essen SGN any costs in line with this reduced business as we previously described.
Now on the positive side, our focus in growth in industrial ceramic and contract manufacturing of industrial products provide sound profitable growth now and in the future years.
It's nice nice not to just have to wait on an increased rig count or commodity price and oil and gas industry.
Our oilfield offerings and oilfield technology ceramic software and consulting provide a base of business in the U.S. and currently.
And likely in the future of growing business in international activity.
Acid guard, our environmental businesses and participant in the difficult us onshore market, but we're seeing good growth in industrial opportunities we're focusing on.
And as mentioned, we have engaged financial advisors to help us with these challenges.
And we fully expect to put all Ur energy's towards solving these problems.
Want to thank you for joining us today, and we will see you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.