Q1 2020 Earnings Call

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Greetings and welcome to the Q1 2020, Frank's International and the earnings Conference call. My name is in Europe, and I'll be the operator for today's call. At this time, all participants are not listen only mode.

We'll conduct a question and answer session. During the question and answer your question. If you have a question. Please press Star then one on your Touchtone phone.

I'll now turn the call overcoming Allison Green Allison maybe in.

Good morning, and welcome to the Franks International Conference call to discuss first quarter Twentytwenty earnings.

Mountain Green manager of corporate Communications.

Our speakers today as shown on slide two earnings presentation, My Carney, Chairman, President and Chief Executive Officer, and well, it's a cool senior Vice President and Chief Financial Officer.

Joining Mike and Melissa for the two and a portion of today's call will be Steve Russell Senior Vice President of operation.

Presentation is posted on our website that we will refer to throughout this call if you'd like to review. This presentation. Please go to the Investor section on our website and Franks International Dotcom.

On today's call Mike will provide an overview of the first quarter. Our response to the company 19 pandemic.

Substantially lower oil and gas prices and reduced industry activity.

Finally, he will review technology highlights and provide a brief update on our profitability improvement project and our efforts to further reduce our cost structure.

I will then review the financial performance of the first quarter and provide a more in depth review our cost reduction initiatives.

We will conduct a question and answer session.

Before we begin commenting on our first quarter Twentytwenty results are few legal items that we would like to cover beginning on slide three.

Our remarks and answers to questions. My company Representatives on today's call may refer to more contain forward looking statements.

Sure Mark for answers are subject to risks and uncertainties and could cause actual results to differ materially from those expressed or implied by such statements.

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

The company has included and 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.

Our complete discussion of these rooms is included in the Companys FCC filings, which may be accessed on the fccs website or on our website. It Franks International Dot com.

Please note that any non-GAAP financial measures discussed during this call our defined and reconciled to the most directly comparable GAAP financial measure and the first quarter 2020 earnings release, which was issued by the company.

Ill now turn the call over to Mike.

Thank you Allison, we appreciate everyone joining us for the call.

I want to begin my remarks by acknowledging the challenges we're facing across our industry.

And with our industry peers and customers we are experiencing the unprecedented impacts caused by the cope with 19 endemic Boeing oil prices.

These events have affected our first quarter results and we will continue to impact us for some period of time.

Our current actions and those we plan to take over the next quarter will prepare us to respond to a number of potential recovery scenarios.

We are focused on controlling every aspect of our business.

Continue to be very proactive as the situation involves.

Turning to slide four as the severity in the geographic spread of the covert 19 outbreak became more apparent in early 2020.

Frank's implemented a series of back sure safety of our employees their families and our customers while maintaining business continuity.

We also moved quickly to find additional ways to control our costs.

I want to congratulate our employees for their ability and willingness to adapt to new ways of working including rigorous safety protocols, while at the same time meeting customer requirements and commitments.

Our laser focus on safety has brought about the welcome result of just one recordable injuries during the first quarter, which is a company record.

In the Gulf of Mexico, We recently celebrated one year without a single recordable incident with over 1.6 million man hours work.

Bob Adobe, we recently celebrated 1000 boes without a recordable incident.

These remarkable records demonstrate the company's commitment to all aspects of vs June.

I am proud that the Fracs team has risen to the occasion of working in these challenging environments.

Despite the strong headwinds braved continues to be in an excellent financial position due to the fact, we have no debt and substantial cash on the balance sheet.

Our financial strength will allow us to whether the current market conditions better than most.

Since we have the largest global market share in our primary lot of business. This gives us a resilient revenue base with the potential to gain additional share is smaller competitors would grow.

We are companies centered around technology in safety without offering that reduces the time to drill pace summit and complete wells.

In response to the reason impacts of covert 19, and the oil price disruptions, we are adapting our operations to be responsive to our customers in all of our global locations.

And our offshore markets, we see our clients working hard to continue projects and complete work scopes, while dealing with the cobot 19 related challenges.

Well some new startup projects are being delayed we believe most will commence as soon as there as a relaxation of cope with 19 restrictions and some degree of oil price stability.

Middle East activity has remained generally strong including increased Trs activity and market share gains in key markets. We were recently awarded a significant news five year Trs contract in this region.

Scheduled to startup in late Q2 of this year.

Our operations of Africa, Hep C negative impacts related to cope with 19 and oil price concern.

Several major operators slowing or temporarily suspending their drilling programs.

The good news is we've been awarded several key contracts, although startups have been delayed.

Newly awarded multiyear projects, both West and East Africa, our anticipated the startup in the latter half of 2021.

Offshore projects in South America prove relatively resilient to covert 19 impacts with limited postponements and cancellations and some activity increases associated with awards from last year.

Within our North American offshore region core customers are generally proceeding with drilling programs, but some delays and downward revisions to 2020 Capex budgets, a major Caribbean project initially warm stack to offshore rigs out of a forward project in response to covert 90.

But we anticipated returned to accrual operational capacity in Q2 with a fifth rig committed refracs in the second half of 2020.

Our submitting equipment Division has recently been awarded 100% of the service to award for this multi rig project, which is a huge win for cracks.

As everyone knows viewers land market has contracted significantly.

We have responded by downsizing, our footprint and staffing levels accordingly.

Technology has always been a key differentiator for Fracs and our technology Division has recently undergone a realignment that will enable us to be more responsive to the boards to the customer and ensure engineering projects are prioritized around the mantra of innovation with the purpose simply put we will occur.

Relatively invest in R&D and product development. When there is either a committed contract or very high likelihood of a business opportunity.

We will continue to work with customers to devote better solutions, but will not engage in build it and they will come speculative technology projects.

Our focus is safety based hands free remotely operated equipment.

EPS, our employees and most of our customers out of the Red zone.

Offshore operators are focused on fewer persons on board as each additional 24 hour shifts slot in cost upwards of $1 million per year.

Both drilling contractors as well as operators complement fracs for its highly crude personnel.

Multitasking and help with various onboard jobs.

We have scaled our R&D development plan to create focus and while we are meeting all development goals. We now we'll still be able to reduce R&D cost 40% year over year.

As an example of our safety enhancing technology.

I'm pleased to report the following its finalists does it.

At the 2019 World Oil awards, the Franks rack back console achieved additional recognition in March of this year as the recipient of the Hearts Special Meritorious Award for Engineering innovation.

The risk of drop joints or stands of Tubulars during stand building operations poses a significant threat of safety.

And we will significantly disrupt operations.

Frank's rack met console presents the unplanned release of Tubulars with mechanical programming God the operators through a pre program sequence. It has been successfully deployed in various regions of the world and is capable of building or breaking down doubles triples will quadrupled stands of tubulars.

Turning to slide five as mentioned earlier on the call and detailed in our earnings press release, we've scaled of our cost reduction initiatives in response to current conditions.

To protect our balance sheet and maximize our cash flow Frank's has intensified our efforts to examine and reduce our cost structure.

We are leveraging the knowledgeable gains in our profitability improvement project and accelerating the actions already in progress.

We are intensifying our rationalization of capital expenditures and deploying even greater discipline. All of the 2020 planned capital expenditures have been revisited individually and weve sanctioned only that capex for which there are under on contracts in place Melissa will provide more detail on these initiatives.

In a moment.

We have made significant progress over the last three.

And this has enabled us to jumpstart renewed cost containment actions since the onset of new industry challenges over the last two months.

While market conditions and unknowns related to cope with 19 will continue to pose a large degree of uncertainty over the near term, we will continue to respond thoughtfully and effectively to ensure we whether the current perfect storm.

While meeting our customers' needs and maintaining our position as the high value low risk provider.

In concluding my remarks, I would ask each of you to think of how many service companies has survived the industry cycles of the last baby years.

No debt and substantial cash on the balance sheet. It's a very very short list in Franks is at the top of Atlas.

We are proud of our Greg history and outstanding implores.

If you are employed be proud secure customer were there for you in good times in bed.

We need to get lost in the flurry of bad news, we hear everyday.

I'll just ask that you remember Franks always has and always will not only survive but thrive.

I'll now turn the call over to Melissa Kugel, Chief Financial Officer, who will discuss the Q1 financial results.

Thank you, Mike preferring to find shakes during the first quarter of 2020, we generated $124 million are happening, which was down from the previous quarter and first quarter of 2019 as discussed on the last call. We were anticipating a decline quarter with new contracts types clean later in the year in addition to.

Thank you anticipated decline, we customarily impacted shutdowns related 19 had occurred during our March period.

And that significantly impacted segment with our key the restatement showing a 41% decline from the fourth quarter 2019.

Customer packet wondering are planned for Q1 were entirely.

Our Q1, adjusted EBITDA totaled $7.1 million and was impacted by several factors, including contract ramp up costs for work with anticipated to begin during Q2.

We also have reserves associated with our current expected credit losses and were significantly higher than anticipated in light of the current market conditions. These reserves totaled $1.4 million in the quarter.

Given the significant macro events occurring during first quarter it wasn't necessary to revisit our core assumptions supporting the intangible assets on our balance sheet.

South of our analysis concluded in various impairments to both long land and intangible assets the largest of which was a $56 million impacted well. These non cash impairment had a significant impact on a net loss reporting at $86 million for the first quarter.

And looking at our liquidity the company is $22 million, an operating cash flow during the first quarter its potential combination of factors, including outlets for kind of payment property taxes, and severance as well as per customer collections during the month of March.

During the month of April we placed a strong focus on re engaging customers to ensure payments for once again flowing uncollected receivables improved by 80% between March and April.

As of the end of April the company had cash and cash equivalents of approximately $185 million up $14 million from the prior month.

The companys $10 million on Capex, this quarter, which affected our free cash flow and largely represented commitment made during 2019.

We have we assessed our planned expenditures for the year aggregating and by approximately 50%.

Turning to slide stats.

Our Trs revenues and adjusted EBITDA declined both sequentially and year over year much of the revenue declined with expecting ethylene several drilling program that we're anticipating I'll period between miles.

And new contract startups for not planned for Q team.

However, during March we did see impact with the onset kovac 19 related reaction and commodity price decline.

Our us onshore operations from us negatively affected with revenue falling over 27% from prior year levels.

Trs adjusted EBITDA was materially affected by these revenue declines at certain one time cost this quarter, including certain operational startup cost in Latin America as well at the credit loss reserves associated with in the accounting pronouncement.

We are monitoring us onshore rig counts weekly and have seen additional significant decline in the period since March 31.

We will continue to respond aggressively to the decline.

And the tubular segment as presented on slide eight that first quarter revenue was $12.5 million with $1.4 million as adjusted EBITDA.

A series of deliveries anticipated for Q1 were delayed or canceled in both our cumulative technology online as well as our drilling technology.

We were able to reduce our cost base in this segment and keep margins about 10%.

The company believes that international growth opportunities for our drilling technology remains strong however, they will likely be delayed given current market circumstances.

Concluding the segment on slide nine our cementing equipment revenue for the quarter was $21.5 million a decline of 14% from the prior quarter predominantly related to continued declines in U.S. onshore and drilling program changes in the us Gulf of Mexico.

Adjusted EBITDA declined $2.5 million associated with follow through from these revenue decline.

Mike previously mentioned our efforts around further cost containment and protecting our balance sheet.

We have identified three primary category of containing costs and maximizing cash flows including focus on labor cost reductions nonlabor expenditures and Capex and working capital management.

Current and projected reduction to customer activity have required us to place even closer scrutiny on rightsizing, our workforce to align with business conditions.

Turning to slide 10, as part of our initial profitability improvement actions, we have already reduced compensation costs by 6%, providing over $20 million and labor savings.

In addition to workforce reduction we are also capturing labor savings related to compensation and benefit changes that will provide an incremental savings at $8 million.

We have completed and have additional actions forthcoming that will reduce our total labor cost in 2020 by more than 20% from 2019 levels and we will be attending to the need to continue to reduce cost and relation to business activity.

Our second cost containment initiatives focused on reducing operational expense structure as Valentin expenditures.

We are actively engaged with our vendors and negotiating discounts and improved terms and are closely examining open purchase orders to find opportunities to further reduce or eliminate planned expenditures.

We have a newly formed Tas Fortunately in purchase orders each week. Our recent efforts curtailed April Pos bank by 60% compared to the trailing 12 month average.

These savings are in addition to the reductions in R&D spend associated with our technology Division, which Mike mentioned earlier.

Capital expenditure and working capital management as our third effort and we are working toward a goal as positive free cash flow generation for the full year 2020.

We have intensified our accounts receivable collections through active customer engagement and noted marked increase in our cash collection during the month April.

Our budgeted capital expenditures underwent a comprehensive review, which resulted in a 50% reduction and planned capex spend for 2020, we have also reduced our commitments for inventory purchases by over 50% for large diameter pipe.

The senior executive team and highly engaged and leading all of these efforts and we will continue to identify and secure further savings during the coming month.

To reiterate we expect the culmination at these initiatives to result in year over year reductions at more than 20% and our overall cost base.

Equivalent to savings in excess of $100 million from 2019.

This demonstrates our strong commitment to control our cost in this downturn as we strive for positive free cash flow for 2020.

And looking forward, we anticipate material declines in both our top and bottom line results over the next two quarters as drilling program delays are likely to continue and program suspensions already in effect may remain in place.

We do anticipate that early Q3 will provide for troughing activity and our expectation is that a gradual improvement for us offshore and international activity will began toward late Q3, coinciding with some previously announced contract startups.

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

Good morning.

Thank you.

The question answer session.

Another question. Please press Star then one on your Touchtone phone.

Using the speaker phone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone.

Moving on standby for any question.

And our first question comes.

Comes from George O'leary from TPH and company. Please go ahead, Sir your line is open.

Good morning, guys.

Boarded warning.

As well as I thought what are your last comment was interesting. Unlike you touched on this a little bit too, but there are some.

Pockets of resilience based on kind of contract awards that you guys already have in hand, I Wonder if you could share more on what Geo markets, you actually think altering the most resilient as we look back in the rear view at the end of 2020 in what some of those Geo markets are that are specifically driving growth for you that today.

I mentioned, Oman is one but in the deck, but any any others would be super helpful.

So I've got Steve Russell here also to help us with the Q and a and.

Since that's a great operational question will XP effect that one.

Yes, Thanks, Mike and good morning, George.

Yes.

We've been forecasting.

Awards here, we've we've seen.

Mop difference in the various geographies of what we see.

Particularly we see some pretty decent resilience in the middle East not just through contractual awards, but we've picked up some additional market share in Saudi that in addition to the noted when in Oman.

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The other place where we see some strength is the Caribbean we've had.

Some activity reductions due to tova disruptions here in Q2, but we see those rates going back to work here at the end of Q2 and more rigs coming into that market. So those are a couple of bright spots and generally challenging environment.

All right. That's that's helpful. And then I wondered if you you guys can compare and contrast, what you're seeing internationally in.

Offshore markets versus what you're seeing in onshore markets and kind of that the delta end velocity of reaction to the lower crude oil price setting connect cobot impacts.

How thats all played out just how offshores behaving differently versus onshore markets.

Thus far in 2020.

Yes, so it's a quite complex picture as you can appreciate out the.

What we've seen internationally in the offshore markets is is a distinction between what I will call the remote markets and the coal markets. So we've got a number of so remote market to the African markets again, the Caribbean that I, just mentioned, where there's been some short term disruption around co bid.

Primarily related to getting cooling equipment in and out of these countries of the close because of cobot risk restrictions we do.

See you see a lot of those projects going back to work here in the latter half of the.

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On land Im not sure if you were referring to us land or international land.

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I think international land for US is very focused on the middle East, which again I mentioned thats been a strong spot for us for looking forwards for this year.

Okay, Great. That's very helpful color than just one more for me you guys talked a little bit about working capital management and the improvement in accounts receivables collections as quite impressive I wonder if there were any.

In April that you mentioned I wondered if there were any kind of bogeys. So our benchmarks that we could watch for as the year progress is from a dsos perspective from an inventory work down perspective, any any kind of guide post you guys are trying to achieve for the year.

Yes, I'll start on that George and that led Melissa pickup audit.

DSO is and reducing there is a it's really quite a complex issue without the labor here at it all starts with the contract you signed invoicing term.

When voice a number of locations globally I think by customers. They are dragging their payable systems. It seems like almost monthly and semis were delays were an operator, so Jay we can't pay for the next 30 or 45 days because we're converting the system. So it gets really really complex, but I can tell you I personally over the next few months.

And going to be working with us the management team to to really focus on working capital management, particularly our IR.

Collections, but as I've said its continuum of activities from contracting getting you're correct invoice out the door.

And then making sure the customer pays and the that can be a slow and sloppy sometime so it's a complicated continuum and we're going to work every piece of that along board most out or not we want to add something from your side I think I think I would reinforce everything that Mike said I think largely the work from home.

Home paradigm greatly impacted the collections in the month of March.

And we were able to really kind of mobilize the task force to try to reverse that trend as quickly as we could in the month of April I think we will be faced with needing to continue to apply a lot of resources to stay on top of it but I think there's a lot of optimism internally that if we apply that a lot of the resources and we keep it.

Customer engagement level high that we can further improved from where we're at Empress further working capital on on the Dsos side, if you will the receivable side.

Also asked about inventory I'll suite that out even more towards the Capex to say you know I mentioned in my remarks around the pipe inventory, which is a big piece of commitment for us. So we feel like we've we've really sort of looked at all of that and cup that away for the year.

But as it relates to the rest of the inventory the PEO task force that I also mentioned that's part of it and what we really do as we look at any equipment needs right. So Steve was in my office today, saying, well Hey can we basin. We freed up this piece of equipment from this location I think that applies to inventory, where it makes economic sense to try to deploy it between.

A region as well as just our capex, so taking and utilizing our tools more efficiently.

We were planning for a very different year than the one that has come to pass and so we've tried to be really nimble and every time a need for piece of equipment comes up that we look everywhere.

In every and every location to see what is available and I think that applies for our larger pieces of inventory as well as our capex.

Great. That's super helpful color guys ill turn it back over.

Thank you once again, if you have a question. Please press Star then one on your Touchtone phone.

Moving on standby for any additional questions.

And I'm not showing any further questions at this time I would like to turn the call over to Mr., Mike King. Please go ahead.

Yes, thanks, very much and I'd like to thank everyone for joining us today on the call and your interest in Franks International and we look forward to providing another update next quarter Goodbye.

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

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