Q3 2019 Earnings Call

My name is Hilda and I'll be your operator for today.

This time, all participants are not listen only mode. Later, we'll conduct a question and answer session.

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I will now like Kinda go over time as Aaron.

I feel you may begin.

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Today's call Micronic, I recently announced Crockett County, Pocock Avago technologies.

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We'll close the question answer session.

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Such statements speak only as of today's date or different African <unk> appetite.

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Please note that any non-GAAP financial measures discussed during this call are defined and reconciled the most directly comparable GAAP financial measure in the dark where 2019 earnings release.

Actually better company earlier today.

I'll now turn the call over to Mike.

Thank you and we appreciate everyone joining us today for the call I want to start my remarks by saying that for the last quarter. The management team has been a tremendous amount of time looking at every area of the company in terms of how we deliver safe quality services and products to our customers.

During the most cost efficient manner.

We called the separate our profitability improvement project.

We examined the entire organization and though deeply into approximately 20 distinct areas of our operations and cost structure to determine how we can operate more cost effectively.

Everything was on the table to be examined with a set of fresh eyes.

And we went through our organization in a zero based clean sheet type approach.

Every member of the executive team has been deeply involved we established an internal workings steering committee, which included a direct reports to the executive team members.

The project started with an eight week diagnostic analysis by globally recognized management consulting firm with long standing successful history of projects.

We set up an import portal where employees at any level could submit opportunity areas and do it anonymously if they liked.

Our employee engagement has been high throughout the process as most of our import base realizes that are more profitable operation will be key to our future.

Having their support has been amazing.

Personally immensely grateful for the professionalism everyone are shown in these past several months.

The reason from our sharing such significant detail is because our investors should know Franks entire employee base. Appreciate the fact, we must boost profitability to the maximum extent possible.

Well, not only preserving and enhancing our ability to safe we serve our customers and provide the Greg technological solutions that have made Frank successful.

These changes, we're making will positively and permanently in fact, our future financial results.

Later in the call Melissa will provide more color on some of the areas we touch.

And give some idea the magnitude of the profit improvement we expect.

While our third quarter results did reflect north American market headwinds facing our entire industry.

Very proud of the steps Frank has taken in the quarter.

And we're definitely encouraged Bob momentum that we are continuing to see in the international markets.

Our longstanding reputation for industry, leading technology and exceptional customer service continues to be or guidepost.

As we implement changes to drive improved long term profitability and generate free cash flow.

Frank we're determined to do everything possible to create value for our shareholders.

One of the focus areas for the management team and the board is the commitment we make to our customers to bring them technologically advanced equipment and well trained personnel.

Mantra is to be the high value low risk provider of services and products that enable our customers wells to be drilled and completed faster safer and with better well integrity than any other service company.

We're increasing our focus even further on inventing and commercializing solutions to drive safety remove personnel from the Red zone and reduced the number of personnel required at the well site.

This is what our customers expect and we're deliver here.

We want to decrease the timeline of investing prototyping and commercializing technologies.

Companies that offer high technology solutions compared to commoditize providers have higher multiple because they offer premium products.

And achieve higher margins over a cycle.

This is the space in which we operate and it is a space in which we have excelled in the past and must excel in the future.

Before turning the call over to Melissa to review the financials in the profitability improvement program in more detail I.

I want to tell you about some are more recent technological achievements and awards.

Our engineering team is totally focused on partnering with our customer base to produce industry leading technologies.

Recently Franks International was recognized as the 2019 World Oil Award winner for our jet spring elevator in the category of Best Health safety Environmental sustainable development offshore.

The Jets spring elevator is a hands free innovative lifting device.

Is designed to lift large diameter pipe and install the pipe into the well eliminating the need for cumbersome and time consuming lift size and lift plants.

Furthermore, eliminates the need for dangers manipulation of the pipe high above the rig floor. The jets spring elevator has been and continues to be deployed on numerous jobs around the world, creating substantial savings to customers, while improving the safety of their operations.

In addition, Frank's rack back console technology was also honored as an award finalist building stands at five requires a number of carefully coordinator and controlled steps and this console mechanical programming and pneumatic control allows this rig floor process to take place while eliminating the need for.

Hazardous areas certification associated with electronic devices.

Direct back console has been successfully deployed in Brazil, and the Gulf of Mexico with more deployment schedule.

As noted last quarter the international certification process for our submitting equipment portfolio was completed opening several new markets for our technologies.

We're now seeing increased traction internationally in the adoption of our summit heads Scott hook and other cementing equipment products and services.

In the third quarter jobs were executed in 12 different countries.

We recently hosted a customer event and our trading rig in Scotland, where we demonstrated our scottrade technology with over 35 customers and attendance, we generated a great deal of interest and have already been awarded our first job to these tools in the North Sea.

We expect greater international revenue contribution for our so many equipment product and service lines in the fourth quarter of 29 team as well as full year 2020.

We also continued to be very excited about the adoption of our drilling technology solutions by our customers.

We completed our 100th vertical drop this quarter and we're now seeing long term deployments as customers are specifying this tool into their drilling protocol.

We have several new drilling technology solutions in development.

All with the same intent of optimizing drilling performance and reducing operational risks.

Ill now hand, it over to Melissa to discuss our financial results and outlook in further detail Melissa.

Thank you Mike during the third quarter Frank.

In the North American market, which was somewhat expected.

As we inherited this earning season and North American land erosion story is not new news and so we will not spend much time to every morning. We've also seen demonstrated in discussed in prior quarters that our tubulars business can share large screen when our customer drilling schedules change.

And this quick one of this quarter's creating some unexpected headwinds.

On the positive sign our international businesses continued to show steady improvement and positive momentum and our margins are showing strong leverage as well.

In reviewing our results on slide four.

Third quarter, we generated $140 million of revenue, which was up 9% and the third quarter 2018.

They are down 10% sequentially largely as a consequence.

Our product inventory.

Adjusted EBITDA was $16 million in Q3 and $43 million for the first nine months of the year demonstrating year over year incremental margins of 35%.

We are most pleased to report that we generated $16 million a free cash for this quarter highlighting our focus on capital discipline in working capital management.

Turning to slide five our tiara segment produced third quarter revenue of $110 million, a slight sequential decrease driven by the substantial headwinds and the north American markets This quarter.

While we were able to maintain growth through the second quarter 2019, despite the declining rig counts as expected our third quarter results weren't factored in we expected headwinds to continue for at least the next couple of quarters.

These challenges have been partially offset in certain international market I continue to be increasing activity.

Europe and the Minnery have both been notable bright spots this quarter Asia Pacific. It's also anticipated to be a contributor in the fourth quarter and this year and into 2020 as well due to some recent contract wins in market share gain.

And the tubular segment has presented on slide six third quarter revenue was $12.5 million a decline of 18% year every year and 44% sequentially. The decline in revenue sequentially was driven largely by the timing of customer drilling schedule and changes to delivery and program and have been forecasted to occur during the.

Second half of this year to remind there are two businesses in the segment tubular product sales and drilling technologies.

Tubular products out business can be characterized as immensely large discrete customer orders that can introduce large swings in our results at times.

We have had several changes to plan deliveries in this quarter that we'd expect may continue into Q4, as some of our customers update and shift their drilling schedules.

That said, we are confident in the long term growth trajectory of our tubular products business. As we currently have line of sight to a much improved backdrop during 2020.

Our customer schedules indicate significantly stronger demand and we anticipate more robust sales in this business than we have seen in the past several years.

Additionally, our reputation for quality reliability has recently opened several international market opportunities for us, including in Mexico, The Caribbean and South America.

Looking to 2020 within our drilling technologies business line and as mentioned by mine. We have recently completed development. After next generation technologies that will give us improved market access to more drilling program.

And focused on increasing our drilling technology asset base and expanding our customer account for tubular products down in order to drive more consistent performance quarter to quarter.

Turning to slide seven.

Our next new equipment segment third quarter revenue declined 4% sequentially, although it increased 7% over the prior year.

A slight reduction in sequential revenue was primarily driven by reduced customer activity and our us land market.

This was partially offset by increased revenue in international markets and the use of Mexico. We continue to increase our presence in the Gulf of Mexico with over 60% market share on floating rigs maintained throughout the quarter.

Turning to slide eight as Mike mentioned in his comments the print management team conducted a series of strategic business reviews, but the goal of streamlining the organization for margin improvement.

It has become apparent that the trajectory of the onshore and offshore markets not be a quick return back to historic levels.

Even if the markets work to fully recover the industry itself will be changed we recognize that in order to be a viable player. In this space. We also will have to regard.

Since going public in 2013, the company has had gone down a lot of infrastructure that comes with being a publicly listed company and have simultaneously track maintain its relationship and customer oriented culture. Unfortunately, our infrastructure was built for a much larger company and a more significant market recovery scenario and what is our.

Our current reality.

The combination of our business revenue has been the initiation they project can be implemented over the next time quarters.

We took a soup to nuts approach and the team has identified some of the following category, where we feel meaningful change can be affected the first is rationalization of location and reducing our overseas cost footprint global reach and serving the basins in which our customers operate imperative to our success. We are pursuing models, where we can move more niche.

Link into and out of jurisdictions rate of return make no sense. In addition to producing some of our heavier regional structures.

Also we are going through the process of evaluating our engineering projects.

We are committed to ensuring that every dollar we spend on an engineering development project goes through a rigorous stage gate process that validates our customer needs.

Im to market and could be expected return to a rigorous challenge.

There will be some projects that we decide to show in favor of more focused development efforts and shortening times commercialization.

We're also evaluating our spans and layers of management.

As I mentioned earlier the frame sits today was down for a different market scenario.

In some of our support organization, we can bring have too many layers of management that create inefficiency and can affect a quick decision, making that smaller organizations need.

Finally, we're also looking to speak at linked with our vendors to renegotiations and create general cost savings are cultural change.

It is imperative for friends to be more cost conscious given our new industry backdrop of slow and prolonged recovery.

We need to set the tone at the top to empower our employees to drive change Ashford count and explore alternatives to the way we operate I'm very encouraged that our messaging has been taken heart and we had started to see the result of back in Q3.

To date, we have already taken actions in our us onshore operations to right size staff and facilities considering recent market share.

We anticipate making significant changes and the fourth quarter, but incremental reductions offset occurring during 2020.

The changes, we're making our sustaining and will affect how we conduct our day to day business processes for the banner.

Our objective is to maintain our global reach and our unparalleled service to our customers while doing so in an efficient manner that vastly improves return to our shareholders.

We have currently identified approximately 30 million of savings that can be implemented between now and we ended 2020.

We will be Actioning, our plans beginning in the fourth quarter and be focused on enabling as much of these savings programs as possible before year end.

Associated with that we're currently anticipating four and a half to $6 million have restructuring expense.

The efficiency plans have been done in parallel to beginning our 2020 budget process.

We will be able to share more details around our 2020 expectations and our progress toward our profitability improvement project on our year end comp.

There are also multiple longer term projects, such as an ERP implementation and procurement savings opportunities involving more cost effective maintenance program.

The savings will be realized principally over the course of 2021 and our attitude of $30 million mentioned earlier, we believe we can exit 2021 with cumulative profit improvement opportunity implementing to bring on that at least 45 million of savings beginning in 2022, and we hope to achieve this run rate well before the end of 2021.

Turning to slide nine for the fourth quarter 2019, we anticipate a salon prank on a topline compared to the third quarter, we're optimistic that with early adoption of our efficiency plan and our high end estimated incremental over last year that we were improved EBITDA quarter over quarter.

Looking to 2020 on slide 10, we're expecting full year topline growth. The contribution from all segments are Trs segment has seen some recent contract wins and activities in certain international basins that brings strong margin contribution.

During this call Weve also discussed strong line of sight in our key pillars business that would bring about double digit top line growth next year.

The international side of cementing equipment segment is getting traction with skyrocket projects starting in at least three new countries. This quarter, and we anticipate stronger ramp up and adoption next year.

What we have struggled to predict the directly and implications to our 2020 financial profile.

That said, we are confident in our ability to exceed $100 million of adjusted EBITDA in 2020, and as we push our savings plans to our budget details and update our us land views, we will provide updated guidance.

We appreciate everyone's participation in today's call, Mike and I welcome your feedback and question.

Thank you we will now begin the question and answer session. If you have a question. Please press star and then one using your Touchtone phone.

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Once again, if you have a question. Please press star and then one using your touchtone phone standing by for questions.

Okay.

We have a question from he had macpherson from Simmons.

No more than the background noise, so I'll ask quickly and you to.

So.

Unless it for the 2020 top line Tubulars is the most of his bowl with double digit and then surely international and I would expect total off shore at least high single digits applying for next year is incredible that just leave the U.S. blampied since that as the black box.

And appreciate the question I think we're still looking through it you know next year, we are going through that process right now presently quantifying essentially the contracts that are rolling over we are optimistic as you mentioned about the off shore space Tubulars does have really strong line of sight.

I think we just need to hold on giving you any more than that probably for a couple more months as we get through everything else like.

That's fair enough, but the drilling contractors are getting pricing now as their historically been a correlation there that we should think about in terms of recovery for your pricing or is that not in your your thinking yet for 2020.

It's not an eye thinking yet for 2020, I'll, let Steve expand upon it as well certainly we would expect there wouldn't be a correlation I would say it's fair steam chime in that we have not factor that into our 2020 budget at present.

Yeah, see and I think melissa's correct on that I mean, we off saying make story on pricing does I think we reach bottom when we're in the early stages of a recovery internationally as Melissa alluded to this a market headwinds specifically in U.S. land that won't go down to give us some challenges on pricing next year.

Got it then it's been last one for me can you offer anything on a cat that for next year yet.

Give us a little bit of time, there and we're still working through some projects as part of linking back to the profitability improvement program. We have some early days, but I think we'd we'd rather ah come back to you with from or guidance there in future.

Got it thanks very much.

Thank you.

Once again for any questions. Please press star one.

Mm.

We have a question from David Anderson from Barclays.

Hi, Good morning, I was wondering if you could just dig into international Trs business, a little bit for me you.

You had said in your remarks that the middle East in Europe .

Were positive for you in the quarter can you just kinda talk about it kind of within your projections are you thinking about next year and you've talked but.

Overall revenue growth.

Can you remind us how much the international business is off shore and I think what you're referring to is more the onshore business and can you just kinda talk about where that business is in terms of kind of your strategic vision in a few years ago. The business you guys got into.

I'm just kind of curious how you feel of the business is running today is that a business that you think you can continue to expand if you could just kind of talked with a different nuances of international please.

Yes. Thank you. So I think first of all if we look forward to next year, where we're generally seeing an increasing market trend internationally.

For us this geographical sort of hot spots for us, we see pretty decent growth coming out of.

Asia Pacific Africa or in your next year.

To the specific comments on the middle east that for us as a mix land and offshore market.

It's approximately half and half.

The offshore being a shelf market and in general I would say that gives us some opportunities for next year, we don't see that as one of the major.

Growth opportunities for next year internationally.

And then when you've talked about your tubular business and kind of the optimism you have there for some of those big diameter pipe does that give you kind of confidence on the offshore market for next year, just kind of curious what you're hearing from your customers. The offshore rig counts kind of plateaued here, a little bit what's your confidence that that offshore rig count picks up next year.

And does that tubular business can you give you some of that confidence.

Yes, Thanks, David tied to Lake you here.

Market for US is localized if you will from our perspective, our customers are going to increase their level of activity.

That gives us strong line of sight and good confidence for Q4 recovering from Q3 and certainly into 2020 also.

And I guess a final question for me would be on some of your cost out program you talked to the additional 15 million they could take out on supply chain. I was wondering you could talk about that a little bit I know, it's been something we've talked about with Franks in past years.

In terms of kind of fixing up some of the supply chain I know you've got different businesses that aren't necessarily talk to each other internally can you just talked about some of.

The plans there of kind of what you're looking at on the supply chain and maybe also just help us understand it's kind of what's the ultimate goal here you had a nice quarter on free cash flow this quarter, but as you look out going forward and as you think about maybe that EBITDA of 100 million plus next year and do you have a goal in mind in terms of the the free cash flow conversion on that.

And how does that supply chain, I guess overhaul fit into that.

So I'll take the supply chain for this mark.

In terms of our business, we have discrete business units. So we.

We actually procure things in a number of locations and our objective there and of course, it's longer term is to get better visibility in terms of all of these functions that are somewhat disparate and bring them together more closely and try to get that volume purchasing power.

By being more coordinated so that's clearly a longer term project.

In that you've got to go your vendors you got to seek to get reductions. If you can't get the reductions you want then you need to look harder for other vendors. So it's definitely a longer term initiative, but we are just in the early stages of that but I think.

I think we can do a better job and we'll we'll be working on that but we didn't want to we view that as longer term not something you can kind of flip a switch and and get those savings in terms of the free cash flow I'll, let the Melissa.

Speak to that one in terms of 2020, Yeah, I think I think I would also add to what Michael said and what you also heard from US is that the supply chain optimization, which coinciding with an ERP implementation, so that $15 million, we would happen too on the back side and having what we view as far.

And more clarity in real time data to be able to react case, a proper category spend to facilitate vendor discussions.

That are working capital management, because we can get a from handle on invoices getting out the door quicker.

And can pull our outstanding receivable imports more efficiently so to the general efficiency that comes along with an ERP implementation is also rolled into that everything Mike said, plus some more it's what I would say from a free cash flow next year perspective, what I would tell you is we're still going through the process right now.

I've really recasting our view as relates to U.S. land as well as pushing through our profitability improvement project. So we are.

It would be fair to say, we're highly focused on free cash flow, we understand its priority in the space and it is a primary metric for us to track.

So we will be looking to opt in <unk> optimized and make it as efficient as possible that being said, we feel like there's still more work to do in quantifying and pushing out the work that we know we can do into the financials to see how it close to the free cash flow line.

Okay. So to be continue there. So actually that was my question about your supply chain and whether or not you had infrastructure kind of improving required and I guess the answers to that is yes. So you think I will take kind of how anything that takes to implement the new ERP system.

Well were largely looking at next year as as our timeline to get too when we start 2021 now we there are things as Mike mentioned there are things. We can do now and we will be doing what we can do now but a lot of this longer terms that starts to tap into when you have good clear clarity to your spend categories and can go back to your vendors with yeah.

Full spend and global agreements.

As you probably know these ERP projects.

Our long and complicated and we're choosing to implement in phases. So one approaches the big Bang, where you try to convert everything at the same time and so our first phase is going to be kind of our financial and back office piece, which would include along the supply chain components and we're targeting to have that pretty much done by the end of next year.

And then there'll be other things beyond that.

In terms of our inventory management and other modules HR that would be added on.

At a later date, but it'll be a sequential process, we're not going to stop and take a break we'll we'll do it one one modulator time, but it will take place over more than one year.

Great. Thank you very much.

You bet.

Once again for any questions. Please press star one.

We show no further questions I would like to turn the call back to Mr. Carnies for final remarks.

Okay. Thank you Hill, where we appreciate everyone joining us on todays call. The management team is very excited about the steps, we're taking to improve our profitability and serve our customers in the safest most cost effective manner. We look forward to updating everyone on our fourth quarter call. Thanks for joining.

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

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