Q4 2019 Earnings Call

Welcome to the Q4 Twain acting like.

Frank's International and the earnings conference call.

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Well again or 2019 Franks International earnings Conference call.

My name is D train and help your operator for today's call.

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Later, well conduct a question answer session. During the question answer session. If he had a question. Please press Star then one on your Touchtone phone.

Please note. This conference is being recorded I now turn the call having a Blake holcomb like you may begin.

Good morning, welcome to the Franks International Conference call discuss fourth quarter full year 2019 earnings I'm, Blake Holcomb director of finance and Investor relation.

Our speakers today as shown on slide to the earnings presentation, or my Carney, Chairman, President and Chief Executive Officer.

The Kugel senior Vice President and Chief Financial Officer.

Joining Michael <unk> for the Q and a portion of today's call will be Steve Russell Senior Vice President of operations natural Lakey.

Your Vice President of Technology, That's got senior Vice President marketing business development.

The presentation posted on our website, we will refer to throughout this call.

We'd like to view. This presentation. Please go to the venture section of our website and Franks International Dot Com.

On today's call Mike will provide an overview between 19, an update on our profitability improvement project as well as the segment technology highlights.

Melissa will then review the financial performance for the fourth quarter and give a brief review of our share repurchase program.

Additionally, she'll give general guidance for the first quarter and full year 2020, we will close with a question and answer session.

Before we begin comedy on the fourth quarter and full year 29 years old it'll be a few legal items that we will like to cover beginning on slide three.

First remark and answers the questions by company representative on today call may refer to our contain forward looking statement.

His remarks ranchers are subject to risks and uncertainties that could cause actual results could differ materially from those expressed or implied by such statements.

Such statements speak only as of today's date worth different as of today specified the company assumes no responsibility to update any forward looking statements as any future date.

The company has included <unk> SEC filings cautionary language identify important factors that could cause actual results could be materially different from those set forth in any forward looking statement.

A more complete discussion of these risk is included in the Companys SEC filings, which may be accessed on the fccs website or on our website at Franks International Dot 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 fourth quarter and full year 2019 earnings release, which was issued by the company earlier today.

I'll now turn call over to Mike.

Thank you Blake.

We appreciate everyone joining us today for the call.

Beginning on slide four I will discuss some of the highlights of 29.

Our fourth quarter results wrapped up a solid year refracs as we delivered double digit top line growth and improved our adjusted EBITDA by more than 70% year over year. Despite a slowdown in the U.S. onshore market in the latter half of year.

We continued to expand our submitting equipment and drilling tools offerings to new markets globally, saying revenues increased more than 30% for submitting equipment and more than 80% for our drilling tools compared to 2018 levels.

This growth demonstrates the value proposition of these products and services to our international customers and we expect this trend to continue as our current customers as well as prospective customers become familiar with the benefits of our technologically advanced solutions.

On the appearance start and 29 team, we continued to secure new contracts and tender awards with our customers on a worldwide basis. The culmination of these 29 team wins led to for the first time Fracs, becoming the global revenue market share leader for casing and tubular running services. This is.

According to a well known independent third party market research firm.

We've always held the where the high value low risk provider of tubular running services at the gratifying their customers agree by awarding us a significant share of their business.

Additionally, we have secured several more new contracts, which are slated to start in the second quarter in Europe Asia in West Africa.

We also recently secured new significant multiyear contracts with major customers in the U.S. and internationally for our submitting equipment and drilling tools service lines.

Due to the multiyear nature of these contracts, we will enjoy revenue growth in 2020 and beyond with these customers.

These awards demonstrate our customers' confidence in the value proposition, our rotating submit heads with skiver surge reduction and corp., reducing technologies bring to their operations.

In some cases, our customers made us the exclusive supplier of these services.

We are proud of these new awards not only because of the recognition of our technology.

But also because they speak to the relentless focus we place on service quality and our safety record.

In our last call we discussed the details of our profitability improvement plan and today, we will update you on our progress to briefly recap during the summer of 2019. The management team performed a detailed diagnostic study along with the assistance of a consulting firm to evaluate our cost and operational structure.

By the time the analytical phase was concluded in late August we had identified 20 distinct areas of our operations and cost structure, where efficiencies could be realized to improve overall profitability.

We then established a program management office staff with several senior level managers supported by the consulting firm to craft specific implementation plans and begin the execution of those plans.

We said at the time the goal of the profit improvement initiatives would be to increase adjusted EBITDA by $30 million in the short term. We also said our ultimate target was a 45 million dollar annualized increase in adjusted EBITDA and those further actions would be completed no later than 2021.

Based on the actions completed today, we have line of sight to the $30 million of cost savings and 20.8 compared to 29 team.

And the majority of these actions to realize these savings are now complete.

We'd like to address a few of our focus areas to provide more granularity on actions taken.

We took a hard look at our technology development and delivery organization.

While Franks has historically had industry, leading technology, we had three distinct engineering organizations in each of our segments Trs tubulars and submitting equipment.

Upon review, we realize we were pursuing too many technology ideas in the somewhat solid management structure.

We believe the different structure would provide greater focus and lead the faster and more cost effective commercialization of our technology.

We now have all engineering and product service line development and management under one organizational structure.

We're shortening our time to market and concept to cash cycle.

The financial governance over technology development is more precise and we now have specific budgets and timelines for each development projects.

This new structure gives us an improved ability to respond to the voice of customer and provide them with the services and equipment they need to optimize their operations.

As a result of this comprehensive engineering and technology review, we've discontinued certain projects and consequently have written off any associated capitalized costs.

Our accelerated commercialization process will bring our customers the best technology sooner and allow them to drill case and complete wells faster and safer.

This focus on our most compelling projects reinforces our commitment to remain the innovation leader in our product and service lines, while dedicating resources to those projects that have the greatest potential for successful commercialization and profitability.

We've also taken steps to improve the efficiency of our field support organization and have taken actions in the fourth quarter of 29 team and the first quarter of this year to eliminate redundancies and increase the productivity of support personnel.

We will continue to manage our business and measure our profitability on a segment basis. However, we have pushed the management of much of our field support cost structure under the purview of our regional geographic leaders, we have better direct accountability of not only revenue, but also the cost residing in our Geo markets.

These changes have led to reductions in our workforce primarily in the operational support structure, while head count reductions are never easy they became necessary to rightsize our organization.

We value our people is our most important asset and has actually increased our training much of it executed by our internal learning and development team.

This is a cost effective way to invest in our employee base.

And provide a highly competent service and delivery team to our customers.

I want to personally thank all of our employees for their contributions and dedication.

As we've all had to embrace a leaner more agile organization, while at the same time continuing to provide safe high quality service to our customers.

Before turning the call over to Melissa to discuss in more detail our financial performance I would like to highlight several notable technology achievements.

During the last quarter, we made the first successful run of our 36 cents extreme Threeq connector with an international operator in the Gulf of Mexico.

Top hole casing sections in deep water drilling programs require large diameter pacing in connectors and these strings can experience installation and operational challenges inherent in deepwater environments.

Frank's extreme three casing connector technology provides operators with a high value lower solution to top hole casing installation challenges. These connectors help reduce installation time and provide superior performance when confronted with high attention compression and bending loads are connectors provide the op.

Players with assured casing integrity over the life of the wells.

In Europe, we recently deployed our mechanized remote boxing device.

This is a hands free mechanized pipe control system used to guide pipe to the well center, replacing the traditional manual stabbing guides and removing personnel from the Red zone.

Frank's is laser focused on meeting the demands of our offshore customers.

They require high levels of process automation, having fewer Persians onboard keeping personnel out of the Red zone.

And cross training our employees for multi skilling.

Our boxing device addresses these expectations because its remote operation means our employers and those of our customers and avoid the risks associated with dropped objects manual handling uncontrolled movement and other red zone risks.

I look forward to providing updates on future calls regarding the progress, we're making in bringing innovative technologies to our customers.

I will now handed over to Melissa to discuss our financial results and Q1 outlook in further detail Melissa.

Thank you, Mike and reviewing our financial results for the quarter, we generated $139 million.

Which was flat from the previous quarter and down 4% from the fourth quarter 2018. During this quarter, we experienced our normal year end seasonality decline as well as continued softness in the us onshore market.

Additionally, a few of our larger international drilling programs idled at year end.

These declines were partially offset by improving product sales and achieve every segment from third quarter Linda.

Our Q4, adjusted EBITDA totaled $14.7 million impacted by $1.3 million additional customer back at reserves at year end half of which was attributable to one customer in Asia Pacific region went into liquidation approximately during the quarter.

To reiterate for the full year 2019 as shown on slide five the company generated double digit top line growth. Despite a significant slowdown any us on shore market.

We also improved our EBITDA in this environment by over 70% and generated year over year incremental margin of 42%.

We began generating positive free cash flow during the second quarter and generated $25 million a free cash flow during the second half every year.

As Mike indicated in his comments, we incurred significant impairments during the quarter.

We care deeply into our organization structure through our profitability improvement measures and determined that the goodwill related to our knitting equipment segment with impaired.

Certain portion of our asset and project base needed to be reevaluated and ultimately imperatives while.

These impairments drove our net loss to $168 million for the quarter.

Excluding these are regular items, our adjusted net loss improved sequentially and year over year totaling $13.1 million and we're looking forward to 2020 with a rational asset base, which we feel will position us for growth in the future.

Turning to slide six our Trs revenue decline sequentially, primarily due to a decrease in U.S. So much on revenue and some idle to international projects at year end.

However, we did see full year revenue increased by 11% from 2018 as well at the 37% improvement in adjusted EBITDA.

These improvements were driven by significant additional international revenue contribution.

Typically in Africa, and Latin America.

These additional revenues were also associated with higher margins.

These improvements were offset by the deterioration in the us onshore market beginning in Q3.

We closely monitor our U.S. land at night, and expect we will see declined year over year and our domestic onshore revenue as the full year impact at the 2019 decline itself in 2020.

However, we are seeing signs of stabilization in the U.S. mature rig count and are hopeful the market will not deteriorate further from its current state.

During the first quarter 2020, certain of our international Prs projects have yet to recommence operations and this will affect our quarter over quarter performance.

Several contract awards occurring during 2019 and they are scheduled to begin in the second quarter of 2020.

This will help drive our plan year over year growth segment.

In the tubular segment as presented on slide seven to fourth quarter provided for a rebound off the third quarter levels coming in at $21.2 million in revenue.

$3.1 million adjusted EBITDA.

This was driven by some delayed orders in Q3 being delivered prior to year end as well as they pull forward as from delivery scheduled for Q1 2020.

For the full year 2019, our drilling technologies business was up 80% year over year.

This business is relatively small in comparison to the size. It's helpful. Franks organization, but we are excited about the increasing adoption of these tools globally and our cultivating the business to be more impactful in the coming years as it continues to grow.

Meeting this growth some white with a year over year, 10% pullback in our tubular products business.

Due to scheduled to ship and reductions in customer drilling program.

During 2020, we are investing in new tubular technology, which will provide us improved access to customers.

On a path to more sustained Graham.

Combined for both of these businesses this segment experienced modest revenue and adjusted EBITDAC rents here every year.

Quarter to quarter revenue and adjusted EBITDA. In this segment can vary based on timing of delivery and we are working on continued market share gains that will lead to smoother and more predictable revenues in the coming years.

Including the segments on slide eight our cementing equipment segment revenue increased 10% year over year, although the us onshore impact did cause a 3% decline sequentially.

Revenue in international markets and the US Gulf of Mexico have continued to improve offsetting the land declines.

Adjusted EBITDA was up 40% in the prior quarter due to higher contribution from offshore rentals and services as well as lower costs from profitability improvement actions.

On a full year basis disconnecting equipment segment grew revenue, 18% and adjusted EBITDA increased 63% with 34% incremental margins.

Much of this growth was driven by 33% increasing international revenues, which now account for more than 20% of the segment's total revenue compared to less than 2% in 2017.

We are now seeing critical mass develop in international markets with this segment.

Finally through serving our traditional customers outside of the U.S., but.

But also by gaining several foreign national oil companies and then can customers for the first time.

We are optimistic about the momentum that this will create breast and the future, which we believe will more than offset the pullback in the us onshore markets.

Moving to our expectation for the first quarter 2020 on slide nine.

We are anticipating a decline in our results quarter over quarter.

This decline is anticipated based on the combination of short term drilling program schedule changes for some of our international customers.

Timing of junior product sale deliveries and certain contracted rigs in us Gulf of Mexico undergoing maintenance.

Despite the slower start in the first quarter of 2020, we have several new projects and contract scheduled to begin in Q2 and later in the year and we remain confident in our ability to meet our previously communicated target of adjusted EBITDA exceeding $100 million and 2020 at this time.

To reiterate the Q1, while we are forecasting is not indicative of the very robust 2020, we anticipate with another year of adjusted EBITDA increased over 70% in a market where customers and is that single digits.

Our view of 2020 assumes no significant deterioration in commodity prices or drastic impacts to regional operations from events associated with the current of Iris.

Our customers have not given its any indication of delays eight factors could result in changes that negatively impact our outlook.

Finally as mentioned in our press release issued earlier this morning.

Management will be initiating a stock repurchase program this year as up to $40 million funded out of free cash flow.

As a management team the place a high priority on appropriately allocating financial resources towards opportunities that offer the highest rate of return on investment.

Whether it involves the use of these resources to build new equipment invest in technology or consider acquisitions, we maintain our focus on taking the actions that create long term value for the company and its shareholders.

And our view be opportunistic repurchasing our shares is another way to benefit our shareholders.

At current price levels, we believe the repurchase of shares is an appropriate use of capital and setting aside a portion of our free cash flow to this repurchase.

Presents an attractive return on investment that will create value for our shareholders over the long term.

With that we will now open the line for your questions.

Thank you you will now begin the question and answer session.

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We have no further questions I'll turn the call back over to Mike Carney for final comments.

Okay. Thanks, I agree to conclude our 2019, adjusted EBITDA was up more than 70% compared to 28 team.

Following that very strong improvement, we believe 2020 adjusted EBITDA will once again exceeded the prior year by over 70% and an overall market that's growing in the single digits. The Fracs management team and entire employee base understand the importance of being cost conscious and generating free cash flow.

Thanks for joining todays call and we look forward to further updates on future calls goodbye.

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

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