Q2 2020 Franks International NV Earnings Call
Welcome to the Q2 2020 fakes internationally earnings Conference call. My name is they trend up your operator for today's call.
All participants I listen only mode.
Later, well conduct question and answer session. Kinda question answer session. If you have a question. Please press Star then 190 Touchtone phone I'm not sure Khalid Alstom Green yellow Green you may begin.
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And Mark.
International Conference call.
Quarter Twentytwenty Arnie.
I know from Green noninterest corporate communications.
Shut off I.
I haven't passion, and my Carney, Chairman, President and Chief Executive Officer.
Nicole Senior Vice President and Chief Financial Officer.
Joining me here.
Your name portion of today's call, we'll just keep <unk> senior Vice president of operation.
[laughter] posted on our website that we were hurting throughout this call.
I'd like to do this provocation. Please ask again that's actually.
Hi International Dotcom.
Today's call, Mike will provide an ever hear the second quarter and our ongoing response to kind of 19 pandemic everything's tenets reactivity.
Additionally, in working with technology highlights and I, probably basketball hockey Pontiki initiative.
Unless I will then review the financial performance corner and provide additional argue our cost reduction program.
We look like for the question answer session.
Oh I'm, commenting on our second quarter Lucky talk even though.
A few legal items have you would like to cover beginning on slide Green <unk>.
Hi, Mark I'm supposed to question I Company Representatives on today's call may refer to our contain forward looking statements such remarks are subject to risks and uncertainties that could cause actual results could differ materially from those expressed Trump I understand.
Statements speak only as of today's date or different appetite I.
The company assumes no responsibility to update any forward looking statements other than any future date.
The company has included an attack you see filings cautionary language identifying important factors that could cause actual results could differ materially different.
Then set forth in any forward looking statements.
A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the I think its website or on our website price 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 measures and second quarter 2020 earnings release, which was issued by the company.
I will now turn the call over to Mike.
Thank you your Allison we appreciate everyone joining us for the call today.
Turning now to slide four as everyone already knows the impact of covert 19, hippy oil and gas sector very hard and it's been a major contributor to the decrease product demand in the market and the significant curtailment in industry activity in spending.
Our Q2 results as reported today represent the first full quarter of Coke 19 impacting our results.
We've seen a variety of responses from our customers and in many cases. The response has to do with how prevalent the covert virus has been an area of operation.
Many of our customers are generally maintaining ongoing drilling programs with minor disruptions at the was other customers that had to shut down operations and certain jurisdictions due to just to go issues with travel or disease spread and their operations.
We continue to see but what is a new programs startups, particularly as it relates to exploration.
Well project delays and reduced rig activity in Q2 were substantial we do see signs of a bottoming and flattening in early Q3 and expect some additional improvements in Q4.
That said there remains a high degree of uncertainty around the duration of the pandemic related shutdowns or otherwise.
The timelines for demand recovery and returned to more typical activity levels.
And on a number of future developments, the timing of which cannot be predicted such as the development of a safe effective vaccine as well as improved treatment protocols.
As I've said before it Fracs, we are laser focused on most factors, we can control such as our cost structure. Thanks to Swift response of actions across our organization, we've been able to preserve our strong financial position through a highly challenging period.
Our ongoing cost reduction efforts has had significant positive effects on our Q2 results.
Year over year, we've reduced our support costs by $26 million when compared to the first half of 29 to.
This means we will have annual year over year cost improvements of over $50 million.
And our plan is to increase this number even more in the back half of the year.
When combined with our operational savings, we expect 2020 will provide for a total reduction in costs of greater than $145 million year over year.
These savings allowed us to hold decremental margins to less than 25% for the quarter and also generate cash flows from operating activities of 26.4 million and free cash flow of 16.1 million.
Despite the many challenges related to covert nine team.
We have not negatively impacted any drilling program.
We continue to safely deliver our service quality performance at historically high levels.
We are effectively the born personnel processes and technology that result in efficient reliable operations that minimize nonproductive time.
We're working hard to ensure our teams are safe and in position to get the job done for our customers I want to thank all of our employees, who have adapted to the current conditions and unselfishly demonstrated patience and flexibility in the face of disruptions.
I do want to call a notable recent operational accomplishments the generated great value for one of our customers.
This situation, we executed a joint submitting and Trs operation.
Behalf of a major operator in the Gulf of Mexico.
Following an extensive pre job technical analysis, and ultra heavy landing string installation utilize the sweeter Franks load bearing technologies.
Using these advanced tools and processes, our employees executed a safe and efficient operation and set a customer book load record of 2.4 million pounds.
This achievement stands out as the second highest recorded hook load across the industry with Franks also holding the industry record for the heaviest ever hook load set in 2015.
In looking at our geographic footprint and how we are weathering. The current storm our Asia Pacific region has held up relatively well with limited covert disruptions and there have been only modest customer delays in the middle East.
We have recently been awarded additional rigs in one development.
And the market is also seeing additional business for our drilling technologies products and services.
Africa has been the continent hardest hit from offshore activity standpoint, with the recent 90% drop and rigs working offshore West Africa.
Fortunately, we are starting to see the early signs of recovery. However, Q3 will continue to be very weak in this market with covert shutdowns and international border closures spill over effect in some countries.
In the us Gulf of Mexico, we've seen a notable slow down in drilling activity, while our Caribbean operations, although affected by our Q2 slowed down are seeing some rigs returned to operation in Q3.
In terms of our land Trs business. The U.S. continues to be the hardest hit market with current drilling activity levels not seen since the 19 forties. Our strategy is to keep a tremendous focus on cost control and right size, our resources to maintain an optimal geographic footprint.
We've been through cycles, many times before and are very accomplished at flexing our resources down in times like these while still being able to flex backup when the business returns.
Periods of disruption such as we're experiencing now then also present opportunities to rethink how we operate.
One of the opportunities. We are season is in the reorganization of our technology Division technology has always been a key differentiator for fracs. The organizational realignment that I discussed last quarter has already shown success and focusing our R&D efforts on innovation with the purpose and the streamline process.
Assesses throughout the product commercialization lifecycle, we have high graded our technology development projects and are confident we're prioritizing those were the highest potential for near term return on investment.
We've also begun a consolidation over manufacturing facilities, taking our global manufacturing footprint.
Tend to five locations, yielding incremental savings of several million dollars a year I.
I would like to discuss our digitalization efforts briefly.
We continue to develop a suite of not only smart drilling tools, but also remote operational capability.
Upping, our employees as well as others on the rig floor out of Harm's way.
Our intelligent connection analyzed makeup system or high Cam is now advancing two high Cam predictive the next generation of our industry, leading award winning Hi, Cam technology.
I can predictive will provide automated evaluation of connection makeup data and we will integrate with other Franks Prs solutions.
Notably I can predictive will integrate with our recently launched I've, Tom autonomous and intelligent power to.
Combined icon and I can't will provide an optimal connection integrity through a makeup and evaluation process using not only real time data, but also proprietary algorithms and database of historical connection data.
I can predictive will combine real time analysis and historical data points to capture compare and evaluate data without operator input.
Deployed with other Frank solutions, we can reduce the number of personnel on board.
Within our drilling technologies product line, the newest improvement of our harmonic isolation tool. The HR tools data Lager was recently successfully trial in the Permian Basin.
This trial has already resulted in new jobs awarded internationally.
The data loggerheads capabilities to our proven harmonic isolation tool by enabling data acquisition for more effective downhole decision, making.
In recent run the data lager successfully recorded vibrational shocks on three different axes. During a drilling operation. In addition to recording revolutions permitted and temperature.
We have now demonstrated the vibration mitigation effects of the HR tool in can provide improved visibility into downhole dynamics.
He has also recently introduced the case was in certain Bu floats system, a new cementing technology suitable for flow color landing color and guide or float shoe applications. This versatile patented solution offers a modular design and thread was interface that can be configured drew.
A wide range of operational requirements.
Eliminates manufacturing lead time, and the costs associated with premium connections as well as transport and storm excess inventory.
Last quarter I introduced our 2020 key initiatives, which include the following as seen on slide five.
Protect the balance sheet reduce the cost base rationalize capital expenditures and maximize free cash flow.
Our performance in Q2 has demonstrated success in putting these initiatives into action.
We continue to position ourselves as the high value low risk provider of high quality technologically advanced solutions to our customers.
We have the advantages of the right talent organizational commitment strong balance sheet and financial discipline to navigate today's challenges and thrive in the future.
Now I will turn the call over to Melissa Kugel, Chief Financial Officer, who will discuss the financial results and our ongoing cost containment efforts.
Thank you, Mike referring to slide.
During the second quarter of 2020, regenerating $86.1 million of revenue.
Let's cut down from both the previous quarter and the second quarter 2018.
This quarter's decline was largely expected unrelated to the full quarter of covet 19, NTT drilling positive and delays.
The certain of our geography experiencing reductions and activity of greater than 80%.
Our Q2, adjusted EBITDA totaled negative $1.7 million.
Any associated activity declines across all segments.
Our cost reduction measures, which Mike mentioned earlier allowed us to hold decremental margins to 24% quarter over quarter.
And examining our liquidity the company produced $26.4 million and operating cash Burns for the second quarter and notable increase from the prior quarter due to cost saving efforts materializing as well as fewer one off expenditures and increasing customer collections.
As previously noted beginning in April we amplified our engagement with customers to reduce our outstanding receivables. In addition, Ken ongoing implementation of our cost reduction initiatives.
As of the ended June the company had cash and cash equivalent of $193 million and in president of $22 million over the previous quarter.
Free cash flow in credit to $16 million in comparison to the negative $32 million reported in Q1.
The company had cash Capex during Q2 at $10.3 million.
This capex, that's mostly related to implant capital projects approved and initiated in 2018, and 2019, which were higher than expected.
Company intends to keep newly initiated Capex in 2020 to less than $10 million and we're planning a total 2020 capex cash.
Less than $30 million as compared to $37 million in 2019.
We anticipate seeing additional free cash flow benefits of our lower 2020 approved capex in 2021.
Turning to slide seven our Trs revenue and adjusted EBITDA declined sequentially and year over year.
Due to the dramatic decline in activity across the globe with the greatest impacts we've seen indirectly Gulf of Mexico and Africa.
Service revenue declines came with Decrementals of 34% to arrive at an adjusted EBITDA for the quarter a $4 million.
The middle East region, and shine industry volumes during uncertain period.
Our sharpest decline from an experienced in your plan as above their Africa jurisdictions.
Ladder of which has been predominantly related to cope with 19 necessitated drilling positive.
And the tubular segment as presented on slide eight second quarter revenue was $8.7 million with $700000 of adjusted EBITDA.
It was a significant reduction in tubular sales, partially offset by a 200000 dollar improvement and drilling technologies revenue from Q1 levels.
Really just had combined decrementals at 18% for particular products and drilling technology.
Concluding the segment on slide nine are finishing equipment segment revenue for the second quarter was $15 million a decline driven mainly by reduced customer activity in the U.S. land and offshore market.
Adjusted EBITDA declined to $900000 with associated Decrementals, a 25% due to market contraction in north and South America.
Turning to slide from the profit improvement actions. We described in our Q1 earnings call and in previous quarters are continuing to show meaningful impact and we now anticipate an approximate 25% reduction and our cost structure year over year inclusive of operational and support costs.
This is a further improvement over our previously stated estimate of a 20% year over year cost reduction.
I think the company support or non operational savings, we estimate reductions of approximately $50 million in 2020.
Our combined savings include initiatives related to workforce reductions purchase order management elimination of non essential spend and negotiated category discounts with significant suppliers.
In Q2, we were able to curtail our PEO issuance by 47% versus Q1, which we feel will contribute to further savings in future periods.
Effective negotiations with suppliers achieved an average 15% reduction on future purchase orders and we are also on track for 30% reduction in our total compensation process from 2019 level.
And looking forward, we anticipate a troughing over the next quarter.
Bright spot what could be materializing in Q4, we've seen a couple of grades going back to work and I'm getting some signals that additional programs may be re initiated late in the year.
This is a tenuous situation that can change abruptly so our focus remains on running our business more and more efficiently quarter over quarter and controlling what we can.
We do think improvement in Q4 as possible for us market, both offshore and onshore and international activity and we believe that 2020, CNN president and overall activity levels across the board.
With that we will now open up the line for your question.
Thank you, we'll now begin the question and answer session.
Question. Please press Star then one and you touched on phones.
If you wish keeping the lift MCU. Please press the pound sign or are they asking.
Once again, if you have an audio question. Please press Star then one on your Touchtone phone.
Payback for questions.
And our first question comes and talent search your from Tudor Pickering Holt Your line.
Okay.
Hey, good morning, and thank you first question is on the.
The cost out programs you've been initiating.
Some good progress over the first half of the year and.
I was wondering if you could help us think about.
The timeline of realization of some of those benefits over the back half of the year it sounds like.
There is still the more wood to chop relative to what you've achieved so far and so.
One how much more what is there to chop on some of those programs and to some should we expect to see.
Additional sequential benefit in Q3 and even into Q4.
Thanks, Thanks talents to the question and good morning, I think as it relates the seasonality here I think as it relates to the cost out program a couple of things. Similarly, we look at each one year over year, we actually see that were already on.
A little bit above our $50 million run rate. So so we would say that we've already kind of achieved the run rate. We're guiding team that being said why we feel like we can make incremental improvements as we're also taking in in flight in Q and HQ, we will actually be re initiating kind of rebaselining. So we've.
Communicated previously the P. IP initiatives will be going back three DSP IP initiatives looking at essentially how much cost we have removed re benchmarking all of the functional areas and potentially we believe taking out sort of another layer of call. So I don't think we could get predictions on how much more could come out but.
But important parts are we're already at the $50 million run rate. So we feel very confident in the 50 million for the whole year.
And we think we can improve it because we are essentially going back to do the reevaluation, which we think well heeled. Some incrementally additional savings to be had so I think those will probably be not as large as the first half of the year, but they will be incremental on top of the 59, we've already guided team and we've talked previously as well about the ERP implementation.
Which leads us to believe we could find another several million dollars and savings next year post that implementation as well.
Okay, great. Thanks for that and my follow up just.
Sort of.
Broader out outlook.
Question, you talked about some stabilization and activity at least in the next couple of months.
But with some rigs starting back up in Q3 really sounded like Q4 is probably the quarter where.
You might see some sequential growth but.
Wondering if you could help us think about which markets are driving that stabilization.
In the prepared remarks, you said the Caribbean is one where a couple of rigs and go back to work I assume Africa as another which markets in general are seeing the most stabilization right now and is it fair to assume under the current outlook you might see some.
Total revenue progression higher in Q4, if these contract startups follow the schedule you think they might right now.
Yes, good morning, Conisbee Russell here I'll also this one.
Yes, I think the sum of uncertainty out there festival in the marketplace.
Going around the various regions.
Middle Eastern Asia Pacific hasn't been as effective as other regions and we see stability in that region going forwards.
Coming to Europe Africa.
Africa was actually on most affected region here in Q2, we had a number of programs that will force to shutdown.
Because of ability to get people in and out the country, primarily around the drilling contractors in the clients, but that affected us.
We've started to see some of those go back to work here in early Q3 and.
We're hopeful that they will continue to ramp up during Q3 in Q4, although still a number of borders the close them.
We have seen rigs go back to work already in the Caribbean, specifically enact the on our operations. So those are all backup to the activity levels. They were pre covidien, Indiana and the some other rigs in the Caribbean that we expect to pick up in Q4.
The unknown to a certain extent here is the what's going to happening us land.
I think everybody sees the thereof, the dropping in rig counts in US land has now stabilized and the Ross and very tentative discussions on client starting to pick up some rigs in us land, but in general I don't see a big pickup in that market here in the near term. So overall I think what was somewhere at all.
Around off them, we're seeing a tentative recovery here.
In probably in Q4 realistic.
Thank you, yes, no I think it's of course, the slippery slope with two more modes of the quarter ahead of us.
Operators.
Generally don't give us a lot of notice if they're going to change program slowed down pickup stop in fact in some cases, we've had operators side. They are going to shutdown a rig and then they change their mind and vice versa. So it's very hard to predict the future.
Well we're optimistic.
We are we're not giving guidance, but I think we're where where to bottom here. So hopefully.
At least in the third quarter, we we wouldn't SEC any further.
So I think youre the easy way to say it is I think revenue for Q3, even though I wouldn't call. This guidance it should be in the flattish range.
Up or down slightly.
And it's all going to depend on the operator decisions.
Once again as Steve said Q4, we're more optimistic that will be heading in the north direction.
Okay. That's very helpful. I'll squeeze one last one end up on free cash flow over the back half of the year.
The key to number.
Solidly positive after years of free cash flow burn in Q1, but as we think about the back half of the year.
Clearly.
All the free cash flow generating Q twos from working capital and as activity begins to stabilize that working capital benefit is probably going to be much reduce moving forward. So.
Just curious at a high level, if you could help us think through the free cash flow moving pieces over the back half of the year.
The I'll make a first comment on working capital as.
As you know we've we've said this many times, we're working very hard to increase our customer collections and decrease our dsos.
Business has contracted so some of that tailwind is over we still have big opportunities to reduce our dsos I have to admit it's very very tough.
These big operators, they always have reason why.
They can't pay it just yet you're arguing over what side of the papers stapled on the invoice.
I can be very picky.
And.
But we're doing our best and we've got several teams of people working on different aspects from invoicing to collection being more proactive.
In terms of calls when somebody goes past do not waiting 30 days or even 15 days, but making sure people know immediately when they are passed new so we've got a big big focus on receivable collections. Obviously, if we can start to get some EBITDA in the back half of the year of that'll help us oil Melissa you want to pick up on that yes sure. So.
So I think.
Mike, Mike said, well, but tag lines here are we think there is some more to gain on under DSL, we were able to free up some collections, we will be going after more and improving DSL further in the back half of the year.
We do have.
Our tax benefit coming in the back half of the year that will aid us as well.
You heard me make mention of Capex, we see that unwind happening in the back half the year. So agreed we got the biggest piece probably of our working capital benefit hearing QQ.
Yes, the back half of the year will be a story.
How much cost are we now saying in terms of asked the PEO unwind I referenced we're seeing less Pos in the system. We think we'll get several smaller tailwinds in the back half of the year be able to optimize DSL further in the back half of the year.
And we're planning on on on squeezing out from the positive free cash flow from the year.
Yes, if we can it I'll get there.
Yes.
There are other ways.
I would say free cash flow is great. We love it but there are other ways in terms of selling excess assets things of that nature. If you look back a year ago. Our cash at Q2 19 was 172 million so were up $20 million to $22 million over 12 month period, and what I call, it's been a pretty bad market. So congratulate.
So the team for looking under every rock for cash.
And Thats, an impressive cash build in terms of where we've been.
Well I agree and thanks for the response and I'll turn it back.
And our next question comes from Ian Macpherson Simmons your.
Your line is open.
Thanks, Good morning, Mike the conversations has run a little bit counter to this but just given your.
You are advantaged balance sheet, certainly would pay would feel to me like.
A buyers market for some good properties out there.
Just given that.
The market headwinds with regaining positive EBITDA with.
The portfolio in place how are you looking more closely to acquisitions.
Hi, there adjacent or a little bit more out of the box to the current foot footprint fronts.
So we're open for acquisitions, we have a quit looking at ideas.
It's an interesting Mark we talk to.
Advisers, various bankers and it's harder to deals done in this environment.
Because have you base if its stock have you base exchange ratio or.
The stock value, where everybody stock is so depressed one counterparty may feel like they're recoveries going to be much faster than another counterparties. So.
The environment in one sense is quite a bit tougher, but on the other and you've you alluded to this the other thing that we have going as a very strong balance sheet.
So we're we're looking at transactions.
Once again the other side of that issue is it's hard to do good deals. If you looked at over long periods. On if you look at 100 deals there may well be five the deepen rise to the level of going into due diligence. So.
We want to be very cautious on one hand, and make sure big deal. We do is very additive.
To our hair, EBITDA and free cash flow certainly.
Yes.
So our brand with a bit but I think we can say we're actively looking at transactions.
But they're hard to do to do a good one so.
But we're definitely.
Actively spending some time what gets me thanks.
Got it.
Thanks.
I wanted to ask you just given the.
The challenges that your largest competitor competitor and offshore Crs has had with with the balance sheet. We used to talk more frequently about your your market share within the.
The offshore, but even deepwater Trs I imagine it has accreted.
You mentioned that you have yet to heaviest.
Drill strings.
Lower today, so certainly the top end market it sounds like you're.
Hitting above your weight, but.
How do you think your market share has.
Evolved and where do you think it could head.
To.
The ramp of the recovery when that comes.
I'll give you a very quick anthro, and then picture to Steve, whose obviously closest in the organization through our various markets.
In terms of lobster oversee of others, which I will level certainly today I'll, let Steve answer this one.
Thanks, So yes, I mean, we've been tracking at offshore market share and I mean, we've seen a gradual increasing market share here over the last couple of years and.
One of the independence assesses out there of market share actually practices number one in the global Trs market in 2019.
I mean deepwater is very much a focal area for us.
And we are picking off projects. So I continue to say the competitive we're talking about via continues to be a very worthy competitor and and continues to chase Chase business, just as hot as we would expect them to here.
We do have some acid availability as the markets draw so that gives us the ability to go and deploy those assets as opportunities come up and we taken by those on a on a case by case basis.
Understood. Thanks.
Thank you Mike.
With answers.
Thats it ever Yep. Thank you for you.
And just as a reminder entered the Q. Please press Star then one then you touched on sound.
And we have no further questions and I will turn call back over to Mike Carney for final comments.
Okay. Thank you to conclude while we are experiencing unusually poor operating conditions in the industry. You can rest assured the employs the Franks are doing everything possible to ensure safe operating conditions, while delivering quality service to our customers.
Additionally, as you've heard from the entire group here, we're being extremely cost conscious. So we look forward to keeping everyone an updated on our progress.
Thanks for your continuing interest in Fracs and there will talk to your next quarter Goodbye.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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