Q3 2019 Earnings Call
We appreciate you joining us this morning, and thank you for your interest in now Inc. with me today as <expletive> Lario interim Chief Executive Officer.
Now week operates primarily under the distribution now and Wilson export brands and you'll hear us refer to distribution now and de now which is our New York stock exchange ticker symbol during our conversation this morning.
Before we begin this discussion on financial results for the third quarter of 2019. Please note. The some of the statements we make during this call, including the answers to your questions.
May contain forecasts or projections and estimates, including but not limited to comments about our outlook for the company's business. These are forward looking statements within the meaning of the US Federal Securities laws based on limited information as of today, which is subject to change they are subject to risks and uncertainties Nash.
Actual results may differ materially no one should assume that these forward looking statements remain valid later in the year.
We do not undertake any obligation to publicly update or revise any forward looking statements for any reason.
In addition, this conference call contains time sensitive information that reflects management's best judgment at the time of the live call.
I refer you to the latest forms 10-K, and 10-Q that now Inc. has on file with the U.S Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business.
Further information as well as supplemental financial and operating information may be found within on earnings release on our website that IR dot distribution now dotcom or in our filings with the SEC.
In an effort to provide investors with additional information relative to our results as determined by us GAAP. You'll note that we also disclose various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA net income excluding other costs and diluted EPS, excluding other costs.
Each excludes the impact of certain other costs and therefore has not been calculated in accordance with GAAP. A reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our earnings release.
As of this morning, Investor Relations section of our website contains a presentation covering our results and key takeaways for the quarter a replay of todays call will be available on the site for the next 30 days.
We plan to file our third quarter 2019 Form 10-Q today and it will also be available on our website.
Now please let me introduce and welcome to the call our recently appointed interim CEO Deco Lario.
Thank you, Dave Good morning, everyone and welcome.
I want to kick off this morning, letting everyone know that especially with regard to serving our customers and executing on our strategy it's business as usual Dino.
Our proven and long serving executive team is very clear about denounce vision for the future and our board is fully supportive of our current strategy.
Because of its enviable balance sheet of very strong customer base, our global reach and especially because of our hard working employees managers and executives the company's well positioned to continue to improve its market position.
I'm grateful for the opportunity in the responsibility that the board has entrusted to me in this interim capacity and I'm very excited join denials outstanding team.
As I get up to speed in my new role I look forward to meeting and working with our dedicated employees and other stakeholders and let me emphasize the now is fortunate to have this proven and long serving leadership team and ever and employee base already in place and I'm ready to work side.
Given my brief time in my new capacity I'll defer today. This morning to dive into the details of the third quarter results, but I would like to touch on our strategy and then highlight a few key themes.
First I'd like to talk to you about some reasons the team here, perhaps has a more positive outlook than others as we faced the current market.
In any market, especially one uncertainty as pronounced is paramount to focus on what you can control and now it's no different.
Denounced promised and focus has been and we'll continue to be delivering superior customer service financial discipline and exercising sound judgment to deliver results without sacrificing our core principles are values.
Now for a few key themes.
Free cash flow generation in the quarter was $97 million, enabling the company to return to a zero debt position for the first time since 2015.
This important milestone as a testament to the continued working capital discipline by the leadership team and our employees across the globe.
This strong performance with further exemplified by improved collections.
It's an inventory turns across all three business segments in the period.
Driving our working capital as a percent of revenue down to 19% for the quarter, thus, beating our 20% targets.
Moving to growth our capital allocation cadence typically follows the ebbs and flows of the overall market and it will continue to do so.
Our appetite in a slowing or contracting market lends itself to acquisitions, while our tendency shifts to organic opportunities during market expansion.
Now that we've reduced our debt to zero and continue to exercise financial discipline, our total liquidity exceeds $600 million, providing ample ability to deploy capital and sees market opportunities.
We're focused on M&A and we expect the pipeline to growth.
Our strategy remains to further differentiate dino and generate accretive returns to the company and its stakeholders.
As an example during 2015 in 2016, we acquired Odessa pumps and power service moves that immediately expanded our product offerings and our value to customers, while ultimately establishing our us process solutions business.
Last quarter, we added two more businesses to bolster the momentum in us process solutions.
These businesses continue to capturing market share and differentiate de now in the marketplace.
In Canada revenue was up 12% sequentially due to increased market activity as it exited spring breakup.
We continue to outperform in Canada, and wind business in a depressed market, we're scaling our organization to match market conditions by consolidating our branch footprint to reduce operating costs, while maintaining our ability to provide superior customer service.
And we remain excited about the long term prospects in the international Arena, and we want to congratulate our international employees in particular Mclean electrical.
For driving international revenue to its highest level since the second quarter of 2018.
So before moving on to discuss the outlook for the remainder of 2019, I will turn call back over to Dave. So he can review the quarter financials.
Thanks stick to the third quarter of 2019, we generated 751 million in revenue down 71 million or 9% compared to the same period in 2018.
Sequentially revenue declined 25 million or 3%.
The U.S. represents approximately three quarters of our revenue and in the U.S. rigs declined 7% sequentially.
While our revenues fared better than that declining 6%.
And when compared to the same quarter in 2018 US Ricks declined 12% with our revenues dropping less by 10% year over year.
Sequential and year over year growth in power service part of US process solutions limited the revenue decline.
It is worth noting the U.S. rigs declined 12 13 weeks in the third quarter now with 124 fewer active rigs since our last earnings call in 260 fewer rigs since year end 2018.
You asked revenues were 567 million, where us energy centers contributed 51% us supply chain services, 29% and us process solutions, 20% of third quarter 2019 revenue.
We have successfully completed the integrations of two second quarter us process solutions acquisitions.
And customer interest in our recently acquired Houston area fabrication business continues to grow.
As an example during the quarter, we booked in order from a top customer for 30 test separators zest and for the Eagle Ford. This additional fabrication capacity allows for shorter lead time deliveries, which are more attracted to our customers with the work done closer to the action.
In the quarter, we want a new multiyear midstream customer contract in the Permian estimated to be $20 million to $30 million year.
We will be providing solutions as well as all the midstream products like high yield settings valves in line pipe.
This new customer will have numerous midstream projects that will be continuing throughout 2020 as they as they will be very active in the northern Delaware basin as they complete multiple processed up processing plants.
US energy centers revenue was down 8% sequentially, primarily due to steal line pipe project sales, which softened in the quarter due to project cycles in a market oversupplied with pipe.
Replacement cost per welded and seamless pipe continued to drop coding putting continued pressure on pipe pricing.
Turning to use supply chain services revenue was down four 4% sequentially as MP customers continue to focus on capital discipline to generate free cash flow, resulting in lower purchases to Dina.
You asked process solutions revenue was down 4% sequentially as expected coming off a record to Q revenue quarter.
Activity for our pump packages fabricated process in production equipment was led by the Permian Bakken Rockies and Eagleford for orders on vessels LACT units pumps and midstream gas in measurement unions, we delivered a large pipeline booster pump packages to midstream customer for crude oil pipeline in the quarter.
Okay.
But that's a pumps is expanding our field service technician program to expand our customer capabilities to surface pump equipment. After the sale.
As customers reduce capital budgets, they are more likely to repair and existing equipment mix, replacing.
Our technicians mean shorter customer wait times and the opportunity for increased product sales and repair work.
Power service growth year over year in the quarter was driven by large lacked packages delivered in the Permian Bakken and powder River basin for major midstream gathering customers as well as MPS.
Our added vessel capacity in Houston area also helped us gain additional quick turnaround SMB package deliveries in the Eagle Ford and backup.
Revenue gains from our piping specialties acquisition yielded additional growth in the southwest Wyoming soda ash mines in power plants.
Canada revenues were 83 million down 10 million or 11% year over year against a 37% decline the rig count.
We continue to outperform ended the depressed Canadian market.
Revenue was up 12% sequentially due to increased activity as we exited spring breakup, our Canadian team continues to win business in a down market with activity in the Cardium in Viking plates government and post production limits are driving lower oil and gas investment and tightening access to credit for customers.
Take away capacity constraints, our league into high levels in inventory, resulting in production curtailments by the Alberta government.
This environment continues to impact denounced Canadian business growth opportunities, but we are concentrated on on improving our position.
And the team there is winning as you can see by the Threeq you revenue result.
Due to reduced activity typically levels in the Canadian market, we are scaling our organization by consolidating and reducing our branch footprint where warranted.
International revenues were 101 million in the third quarter 2019 up $2 million from a year ago net over 3 million impact from unfavorable foreign exchange rates.
Our international segment revenue was up 4% sequentially on increased project activity.
In Latin America, we capitalized on an increase in drilling activity in Mexico, and Brazil, resulting in MRO equipment sales.
We're also seeing an uptick in OEM and MRO product sales exported to West Africa.
We experienced some softness in Asia market and flatness in the middle eastern market sequentially with a slowdown in rig load outs and credit tightening across international region.
We are evaluating international activity to bolster resources or pull out costs as needed.
In the third quarter gross margins were 20.0% 30 basis improvement sequentially due primarily to product in geography mix pipe sales, which are trading at lower margins today declined as a percent of sales in Canada, which is trading at better than average product margins grew as a percent of sales these mix.
Effects enabled a welcome overall gain in gross margins.
Gross margins were 19.9% year to date September 2019, and 20.0% year to date September 2018, we're pleased with the results of the strategies to emphasize higher margin product lines.
And employed technology to maximize order when rates and product margins, enabling the kind of year to date price stability. We've seen this year amid otherwise deflationary environment.
We expect gross margins to be choppy in the near term as the market reacts to reduced activity levels oil and gas commodity prices and more directly to observe steel price declines.
Warehousing, selling and administrative expenses or WSA was 136 million or flat sequentially and down 6 million from the third quarter 2018, as we made expense adjustments in the period to reflect market trends.
You are say is down $15 million year to date September 2019 versus year to date September 2018, we continue to focus on efficiencies and have reduced headcount by about 75 in the third quarter, an additional 75 reductions in October or 150 reduction since the end of the second quarter.
When considering locations closed or consolidated in 2018 and through the third quarter of 2019, the revenue generating those locations approximated 4 million more in Threeq, you 18 than the Threeq you 90.
Or 26 million more another day basis.
While we get reset retain some of the revenue by supporting customers from other locations, we were able to move resources elsewhere and improve earnings and returns on working capital.
This remains key edina grow the business, while demanding improved productivity and working capital velocity. This is the tactical side about scaling the business to meet market demand.
In the fourth quarter, we expect WSA to be in the mid to low $130 million range.
Operating profit was $14 million were 1.9% of revenue net income for the third quarter was 10 million or nine cents per diluted share.
On a non-GAAP basis EBITDA, excluding other cost was 24 million or 3.2% of revenue for the third quarter 2019.
Net income excluding other cost was 9 million or eight cents per diluted share.
Other costs after tax for the quarter included the benefit of approximately $2 million from changes in the valuation allowance recorded against the company's deferred tax assets offset by approximately 1 million and other costs after tax in the period for severance.
Our effective tax rate for the three months ended September 30, 29 team as calculated for us GAAP purposes was 15.2%.
Moving on to operating profit the us generated operating profit of 9 million of 1.6% of revenue a decline of $12 million when compared to the corresponding period of 2018, primarily due to a decline in revenue, partially offset by reduced operating expenses.
Canada operating profit was 4 million or down $1 million when compared to the corresponding period of 2018 as a result of the revenue declined mentioned earlier.
International operating profit was milling 1 million or up $1 million when compared to Threeq you 18 due to the increase in revenue coupled with the decline in operating expenses.
Turning to the balance sheet cash totaled 113 million ended the third quarter with 76 million located outside the us during the third quarter 2019.
We repatriated $5 million from our Canadian operations in the period.
We exited the quarter with no outstanding borrowings against under our revolving credit facility, achieving a zero debt position.
At September 32019, our total liquidity from a credit facility availability plus cash on hand was $620 million.
Working capital excluding cash as a percent of revenue from the third quarter 2019 was 19% under 20% for the first time spent on.
Accounts receivable were at 466 million at the end of the third quarter down 30 million sequentially, improving dsos to 57 days.
Third quarter inventory levels were 548 million, resulting in improved inventory turn rates to 4.4 counties.
And accounts payable over 326 million at the end of third quarter with days payable outstanding and 49 days.
Net cash provided by operating activities was $101 million in third quarter with capital expenditures of approximately 4 million in the third quarter and $7 million year to date.
Resulting in 97 million in free cash flow in the quarter and 212 million in free cash flow for the trailing 12 months.
I'd like to close with the Sameer, where where we stand through three quarters.
In our February guidance, we said that we expected 2019 revenues to be flat to a decline in the low single digits year over year and through nine months 2019 revenue is within that range.
We said free cash flow would be similar to 2018 may be better and free cash flows actually more than doubled the 2018, three Q year to date level at 143 million.
Or $212 million on a trailing 12 month basis through September we said, we'd be strengthening our market position and we did that markedly in Canada and in US process solutions. We said, we would work towards our goal of 20% working capital excluding cash as a percent of revenue and we achieved 19% in the quarter. We said, we would maintain price discipline.
And that we'd have to defy gravity on price if the market were to slow down to maintain gross margins and it has and we did after nine months in 2019 year to date gross margins were 19.9% in a deflationary period.