Q1 2021 FTS International Inc Earnings Call

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And as far as another reminder, today's call is being recorded for Sam.

The conference call beginning just one minute.

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Thank you and good morning, everyone. We appreciate you joining us for the Fts International Conference call and webcast to review, our first quarter 2021 results.

As a reminder, this conference is being recorded for replay purposes.

Presenting today's prepared remarks is that for <unk>, Chief Executive Officer, Mike Doss for.

Before we begin I would like to remind everyone that comments made on today's call that include management's plans intentions beliefs expectations anticipations or predictions for the future are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

These forward looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those expressed in any forward looking statements.

These risks and uncertainties are discussed in the company's annual report on form 10-K and in other reports the company files with the SEC.

Except as required by law the company does not undertake any obligation to publicly update or revise any forward looking statements.

The company's SEC filings may be obtained by contacting the company and are available on the Companys website, Fts Si dot com and on the SEC's website SEC Gov.

This conference call also includes discussions of non-GAAP financial measures. Our earnings release includes further information about these non-GAAP financial measures as well as reconciliations of these non-GAAP measures to their most directly comparable GAAP measure.

We do not provide forward looking reconciliations for forward looking non-GAAP measures because the timing and nature of excluded items are unreasonably difficult to fully and accurately estimate.

I'll now turn the call over to Mike Doss. Please.

Please go ahead.

Okay.

Good morning, everyone and thank you for joining us for today's call I'll start by going over our financial and operational results for the first quarter and provide guidance for the second quarter and future periods. I'll then provide an update on our flagship innovation machine IQ and fleet automation and finish with some comments on our emissions reduction initiatives before turning to Q&A.

Let me begin by mentioning that when referring to our fourth quarter results I am referring to them on a combined basis that is by combining the predecessor and successor periods that we're required to report the predecessor period runs through November 19th 2020.

Revenue for the first quarter was $95 9 million compared to 48, $49 8 million in the fourth quarter, an increase of over 90% we.

We had $7 8 million of adjusted EBITDA in the first quarter of $13 million increase sequentially.

The higher revenue was primarily driven by three items an increase in fully utilized fleets on average price increase of roughly 10% and an increase in the amount of materials and freight that we provided to customers.

While the higher prices were instrumental in getting us to positive adjusted EBITDA in the first quarter. The full effect of those prices will not be realized until the second quarter.

Like others in the industry, we experienced significant disruptions from winter storage Winter storm Yuri in February.

We estimate that the disruptions caused by the storm itself and lingering logistics impacts.

Cost us about 700 stages, which we estimate adversely affected adjusted EBITDA by $2 million to $3 million.

We averaged 13 active fleets in the first quarter compared to $10 five in the fourth quarter when combined with higher fleet utilization, we were able to complete 35% more stages.

And pumping hours increased by 51% in the first quarter.

Pumping hours increased more than stages, because average pump time per stage increased by 12% due to changes in job mix.

This quarter, we started reporting pumping hours per kit is because it has become an increasingly important operating metric.

Most of our customers evaluate us based on pumping hours, and where pricing jobs using pumping hours to ensure that we account for the variance in profitability.

Different job designs.

We also are now reporting the cost of materials and freight.

We provide the customers, which increased to 20% of revenue in the first quarter compared to only 7% in the fourth quarter materials and freight specifically relate to the total delivered cost of sand and chemicals.

As the industry followers now these percentages can vary significantly between periods and between Frac companies.

Because there is essentially zero margin in materials and most of our customers prefer to handle it themselves. We focus on equipment charges in what we call job profit, which is revenue less the cost of materials and freight.

SG&A was $10 5 million in the first quarter compared to $9 8 million.

In the fourth quarter, the increase was primarily due to compensation and professional fees offset by a $1 million reduction.

And stock based compensation.

We currently expect SG&A, including about $4 million of stock based comp to be between 40 and $45 million in 2021.

For depreciation and amortization I did want to point out that our new quarterly run rate is between 14 and $15 million, which is reduced from predecessor periods due to due to the reevaluation of our assets in connection with our emergence from bankruptcy in the fourth quarter.

We had a net loss of $7 9 million or <unk> 56 per share in the first quarter compared to net income of 93.

$3 million in the fourth quarter, which included a net benefit of $115 million from reorganization items.

Capital expenditures for $5 3 million in the first quarter compared to $1 8 million in the fourth quarter. We have no growth, we had no growth capex in either period.

We continue to be capital disciplined and cost effective in maintaining our equipment in good working order enhanced by our digital initiatives.

The sustained solid performance of our equipment as evidenced by our ever increasing operating efficiency working on some of the industry's harshest conditions in terms of rate and pressure.

We ended the quarter with $86 4 million of cash and $31 6 million of availability under our revolving credit facility for total liquidity of $118 million.

Cash used in operating activities was $15 million in the first quarter. However that included a $22 million increase in working capital to support higher revenue.

We also had a cash usage in the fourth quarter, but that period is distorted by restructuring costs.

Looking ahead to the second quarter. We currently expect adjusted EBITDA to be between 11 and $15 million.

Fully utilized fleets to be between 10, and 12 and continued strength in stages and pumping hours per fully utilized fleet.

The slight reduction in fully utilized fleets in the second quarter relates to gaps in our operations calendar caused by being ahead of schedule and quarterly budget exhaustion by a couple of our customers.

We currently expect to increase to 12 to 14 four fully utilized fleets in the third quarter the outlook for the back half of the year looks solid and we currently expect adjusted EBITDA to be in the $50 million area for 2021.

We also expect further positive momentum in terms of fleet count and pricing levels going into 2022, allowing us to achieve more normalized profitability levels next year, which we put in the area of $10 million of annualized EBITDA per fully utilized fleet.

Turning to technology last month, we issued a press release about the successful launch of our fully automated equipment health monitoring and control technology.

This technology integrates K CF technologies machine IQ or M IQ with our pump control called Patrick's and other support systems I am pleased to report that is now deployed to nine fleets as of today and.

And we expect that to have it rolled out to all of our remaining active fleets by the end of this month.

This technology enables us to pump at a consistent rate throughout a stage more closely the job design than ever before in an industry, where the majority of stages are completed with some divergence from job design. We believe this technology has incredible untapped value.

It does this by drastically reducing or eliminating disruptions caused by pending equipment failures, such as cut valves and seats loan packing for engine are power and problems.

By avoiding mid stage disruptions average pump stages.

Average pump times per stage will decrease adhering to job design.

Further this technology improves maintenance outcomes for our equipment by avoiding more costly failures that could occur if not immediately identified and mitigated.

Avoiding equipment failures during a stage also greatly improve safety on location.

Lastly, we remain committed to providing our customers with more emissions friendly equipment.

Currently has seven dual fuel fleets deployed and we stand ready to quickly and cost effectively convert more fleets depending on customer demand.

Further reduce emissions we are working on utilizing the fleet automation technology I, just discussed to optimize diesel displacement rate on our dual fuel units.

We're excited about this potential and we also are evaluating other ways to operations and lower fuel consumption <unk> increased displacement.

We continue to seek opportunities to utilize our cost advantaged in house manufacturing to replace tier two engines with tier four DGB engines or build a new tier four DGB fleet to reduce to replace at tier two fleet DGB stands for dynamic gas blending.

However, we're finding that the economics for these upgrades still do not work in the current environment to justify the investment we will need to have a suitable commitment from a customer at a premium to today's pricing.

We will get there just not today.

Okay.

I'd like to draw some distinctions about the different types of engines that im referring to by DGB on specifically, referring to the cash $35 12, a tier four final DGB engine.

Which is specifically designed to burn natural gas and diesel fuel.

It's designed for maximum displacement rate of 85%. However, we expect average displacement to be closer to 75% a tier two or regular tier four engine that has been outfitted.

With a dual fuel upgrade kit has a lower average displacement rate also the use of upgrade kits is not as beneficial in reducing total greenhouse gases due to methane slip.

We believe that the tier four we believe that tier four DGB engines are the best emissions reduction solution currently available in terms of displacement rate performance maneuverability operational flexibility and cost.

In the future, we think that natural gas fired reciprocating engines as part of a modular electric fleet could become a competitive solution.

That's all I have for prepared remarks, operator, let's now open it up for Q&A.

Thank you very much.

And if you'd like to register a question. Please press the one provider for on your telephone Youre.

<unk> III on prompt technology request.

If a question has been answered or.

So draw your restoration in please press star one.

Better free.

Once again on the phone do you have any questions or comments on behalf for today. It is tier one for on your telephone keypad.

One moment please for the first question.

Yeah.

And we'll proceed with our first question on the line from John Daniel with Daniel Energy Partners go right ahead.

Okay.

Hey, guys nice improvement in the revenue this quarter.

Mike.

On long list of benefits from the machine IQ.

And I'm just curious is there any way to quantify that or is it just too.

<unk> net or too early at this point.

Well, we think there is significant potential there, but it's a little too early to really quantify what it means I think theres two elements to it there is reduced maintenance expenditures in terms of Capex and R&M expense.

Which we've already started to realize some of that over the years, because we've been using smart diagnostics.

But we expect that to increase with them with <unk> deployed and then also monetizing that from the customer. We think this is a good value proposition.

<unk> made with this technology and we just need to make sure that that gets out there.

Customers increasingly feel comfortable with it and willing to pay for it.

Okay fair enough.

Sure.

Other one is on <unk> fracs.

Now for you guys has been actively doing any yet you will do it but.

Assuming that answers eventually yes are you going to treat that as one fleet or two how are you going on reported that.

Any thoughts yes, yes, so in the first quarter, we had the Tucson will frac working and I think in the second quarter. We will have also too.

Maybe one five okay, but it.

But yeah, we count that as one fleet, it's basically a fleet and a half worth of equipment, but as you know we're doing two wells at a time.

Got it okay.

And then just on the outlook.

Gave us pause.

<unk> guidance for Q2 and into Q3.

Do you have any reason at all to believe that there is a.

Q4 slowdown because people outspent budget or is it too early.

It's too early to say it does seem like E&P companies or are now focused a little bit more on quarterly spend maybe it has to do with the earnings season in earnings calls but.

It appears to us that they're trying to flatten that out but I would say that every year and then every year has ended up being a little bit different in December.

Okay.

Fair enough I guess when you look at some of the Marcellus guys. It seems like they might be front end loaded, but others are not in zone.

My observation on tomorrow.

Okay, guys Hey, Thank you for your time as always.

Great. Thank you John.

Thank you very much.

Once again as a reminder, if you'd like to register any questions or comments for the telephone you may do so now by pressing the one for on your telephone keypad.

We'll get to our next question on the line from John not from Simmons Energy. Please go right ahead.

Good morning, everyone and thank you guys for taking my questions.

It looks like your average 13 fleets in Q1 and mentioned that the outlook going forward looks pretty positive.

And it might be too early to tell but specifically in the back half of 2021.

Where do you see the fleet count going and if you could also touch on the pricing environment.

And maybe where you see EBITDA per fleet going in the back half of the year.

Yes, sure so I think in the back half currently.

We're anticipating somewhere between 13 and 14 active fleets and so fully utilized fleets will be somewhere in that area.

And so that's our current expectation, yes, I think if the demand is there and the price and is there I think would definitely willing to activate additional fleets, but at this point, we're remaining pretty price put equity price disciplines, and really want to see pricing move up before really doing much more on activations.

So in terms of annualized EBITDA per fleet, I guess that had to do some quick math it.

It did give the $50 million guidance for them for.

For the full year, I think that equates to $5 million annualized EBITDA per fleet in the back half.

Okay, great. Thank you that's super helpful. That's all I had and I'll turn it back.

Thank you.

Thanks, John.

Thank you very much.

Our next question on the line.

Stephen Kingara with Stifel go right ahead for me the question.

Thanks, Good morning, gentlemen.

I guess.

Two questions, one just sort of around the whole pricing dynamic can you talk a little more about what are you seeing in the market as far as.

The e&ps preference for the dual fuel assets and their willingness to pay up for them.

And how do you think it evolves.

Yes, that's a great question I think everyone in the industry is talking about that.

We currently don't see much of any pricing power as it relates to dual fuel sometimes it's a qualifier on an RFP.

But in terms of expected economics, what can be achieved at a pricing level, we don't see much of a premium and I am talking about tier two dual fuel the one that's been with the upgrade kits.

I think thats just because it's the market is still oversupplied, even though it's in much better condition than it was six months or a year ago.

There is still ample fleets out there bidding for work and so there is a kind of a ceiling on on where prices can go we think in.

But as it relates to some of the tier four DGB. It appears that there may be some some incremental pricing that's being achieved.

We're working hard to try to get that ourselves had a number of conversations and we're just not.

We're just not seeing it anything.

Strong at this point I think in terms of where that evolves I definitely think that there will be more pricing power associated with us those dual fuel technologies, especially tier four DGB.

There is quite an investment.

To be made to convert a fleet or build a new fleet and it just makes economic sense that there needs to be some backstop against against that in terms of customer contract and an improved economics versus a tier two for sure and so I think as the market tightens up I think is more equipment gets attrition out of the <unk>.

<unk>.

And tightens up a bit I think if we see an increase in demand along with commodity prices you just get a tighter market I think youll start to see more spread in the pricing between legacy tier two and the tier four DGB I think the tier two dual fuel.

Basically priced right around the same as just a regular tier two from what we're seeing.

Great. Thank you and one.

Without getting too specific and trying to narrow down to a number.

Your guidance as you noted suggested kind of $5 million in the back half of the year annualized EBITDA per fleet.

Just on sort of efficiencies.

Where can that go like absent price.

I imagine you need price to get drew.

A dramatic dramatically higher but can that number go.

No.

789 range without material price or how should we think about that dynamic between sort of overhead absorption and price going forward.

Yeah.

Yes.

789, just based on efficiencies as a stretch for share. We do think there is continued room for efficiency improvements if theres more sample fracs that we start seeing theres just ever increasing efficiency as it relates to logistics and getting more pumping hours per day.

On a lot of our fleets routinely are pumping 1920 hours a day and so.

Theres only so many hours on a day to be able to pump so were hitting some limits.

Do you think the use of <unk> to shorten the average stage times could result in more stages and more productivity coming out of that those kind of digital technologies might might allow some additional.

Efficiency as it relates to stages per day or per period.

Sure.

But I think it's I wouldn't want to put too high of a number on it at this point it certainly would be helpful, but nowhere near as impactful as pricing just given the operating leverage in the business.

Okay, great. Thank you gentlemen.

Thank you very much Inc.

And we will proceed with our next question on the lifestyle for a follow up question from the line of John Daniel Daniel Energy Partners go right ahead.

Hi, Thanks for let me come back yet.

Mike or body as you alluded to the different new power solutions that are coming out whether it be DGB or the gen set im curious if youre looking at any new technologies on the on the pump side the power on site.

Well, yes.

Certainly interested in that because I don't think theres been nearly as much innovation on the pump side as a as there could be or should be in and so I think if you start looking at some of these new designs, where we're often talking about on one trailer 5000 horsepower or something in that area right compared to todays 2500 horsepower configuration.

As you know, we manufacture our own pumps and so we're looking at opportunities to actually test and see what the capability of our existing pumps are at those higher horsepower.

And to see what modifications, we might need to beef it up.

And to be reliable at those higher horsepower numbers, but we're following what.

What some of the.

Traditional manufacturers like Gardner Denver doing.

We may also purchase and test some of those pumps as well in addition to working on our own.

But is there anything else that's on the pump side.

Yes.

No.

And then the last one for me just on some on the.

<unk> designs I imagine some companies.

Last couple of quarters.

One year for sure.

Maybe reduced profit loads and all that per well on the same money has there been much demonstrable change in net well well designs for the last few months.

We haven't seen.

Nothing discernible John.

Okay. All right. Thanks again for let me come back yet I appreciate it.

Sure. Thank you Joe.

Thank you very much and we have no further questions on the phone lines. Please continue with the presentation or any closing remarks.

Okay, well, let's go and wrap up we'd like to say that.

Very excited to be on an upward trajectory, especially after last year.

As I mentioned in the press release, our financial flexibility operating efficiency safety record and innovation has never been better in the history of this company.

So thank you again for your interest in Fts Si and we look forward to speaking with you again next time.

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