Q2 2021 FTS International Inc Earnings Call

Please standby the conference will begin momentarily. Thank you for your patience I should please remain online.

[music].

Thank you and good morning, everyone. As a reminder, this conference is being recorded for replay purposes participating on today's call will begin Davis Chairman, Mike Doss, Chief Executive Officer, Buddy Petersen, Chief operating Officer, and Lance Turner Chief Financial Officer.

Before we begin I would like to remind everyone that comments made on today's call 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 1995 each.

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

These risks and uncertainties are discussed and the company's annual report on form 10-K, and and 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.

And he is the SEC filings may be obtained by contacting the company and are available on the company's website at <unk> Dot com and on the SEC's website SEC Gov.

This conference call also includes discussions on 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 for.

Fully and accurately estimate.

I will now turn the call over to gene Davis <unk> Chairman.

Jamie.

Thank you Michael Good morning, and welcome to Fts sized conference call and for the second quarter of 2021.

We are pleased that you could join us today.

This morning, I will turn the call over to Mike Doss to review the financial results for the second quarter and discuss on a major operational initiatives.

And then make a few comments and turn the call over to questions Mike.

Thanks, Jean starting with our financials revenue was $99.8 million and the first quarter up from $95.9 million and and the first quarter $99.8 million and the second quarter I meant.

Adjusted EBITDA was $13.8 million up 77% sequentially.

The higher revenue was the net impact of 3 items each of which had a similar impact in terms of magnitude first we had an approximate 7% increase and pricing.

<unk>.

Total pumping hours increased by 5% next partially offsetting these 2 items there was a decrease and the amount of materials that we provided to our customers.

Materials and freight costs as a percentage of revenue was 11% and in the second quarter compared to 20% and the first quarter. This had no material impact on gross profit as we've discussed on previous calls our focuses on maximizing gross profit.

Our job profit, which is revenue less the cost.

Materials and freight not gross revenue most of our customers have sophisticated supply chain capabilities and prefer to arrange for their own materials. This works for us because there is essentially no margin and commodity products and we avoid the working capital carry.

To give a sense of magnitude, if we provided materials, including sand chemicals and fuel to all of our customers on all stages. Our revenue would have been 150 to 200 million higher.

Our operating expenses also would've been $150 million to $200 million higher.

We had 13 active fleets and the second quarter and 11.8 fully utilized fleets unchanged from the first quarter.

While utilization held at just over 90% pumping hours per day increased by 7%.

SG&A was $12.5 million and the second quarter, including $1.7 million of stock based compensation. This compares to $10.5 million and the first quarter, including <unk> 9.

<unk> 9 million of stock based comp.

The increase was primarily driven by compensation with the restoration of salaries that were reduced in 2020 due to the pandemic.

And higher stock based comp related to divesting of certain performance based awards that were granted in 2020.

Capex was $7.5 billion and the first quarter compared to $5.3 million and the first quarter.

And I believe I said first quarter Capex was $7.5 million and in the second quarter our capex.

Which is all maintenance related year to date continues to benefit from our in house maintenance capabilities and digital innovations these allow us to deliver.

And maintenance Capex level of $2.5 million per active fleet over time, which we believe is 1 of if not the most cost effective and the industry.

Time, and again, we have proven the durability and sustainability of our equipment as our operating efficiency has continually improved all while pumping and some of the most demanding environments.

This and perspective, our Frac units are now pumping and 150% more hours.

Per year, and then 7 years ago.

We ended the quarter with $99 million of cash and $32 million of availability under our revolving credit facility for total liquidity of $131 million.

Cash provided by operating activities was $20 million and the second quarter.

Which included a $6.7 million release of working capital, primarily due to better than expected collections.

And the and the first quarter, we had a $22 million increase and working capital, resulting in net working capital increase net year to date of $15 million.

We're happy to be back and cash generation mode. After a severely depressed 2020, and the completion of our restructuring and November of last year.

Turning to the outlook. We currently expect adjusted EBITDA to be between 14 and $17 million and the third quarter fleet utilization is expected to be comparable to the second quarter. The pricing is improving incrementally and the mid single digits.

Our operations calendar has been quite uneven and recent months April and May were high utilization months, whereas June had more white space and the third quarter is expected to be essentially a mirror image of the second quarter. We've had just about as much white space and July as we had in June but our customer is now essentially for this month and next month.

We think this is the result of our customers managing to the second quarter.

On Capex budgets.

As for the rest of the year, we're starting to gain greater visibility into the fourth quarter, but we are not yet and are positioned to provide specific guidance. However, we remain confident about exceeding $50 million of adjusted EBITDA for the year.

SG&A is expected to be and the range of $45 million to $50 million for the year, including approximately 4 million of stock based compensation.

Maintenance Capex is expected to be between 30 and $35 million for the full year total capex is expected to be between $45 and $50 million, including growth Capex associated with the construction of a new fleet that I'll talk about next.

As you May know there has been a lot of discussion and the industry about lowering emissions equipment and recent times and the market is beginning to become segmented by equipment type.

We have been a leader and dual fuel for years and we currently have 7 dual fuel capable fleets out in the field.

And we can cost effectively provide additional dual fuel units to customers upon request.

Note that these fleets have tier 2 engines that are outfitted with and aftermarket conversion kit with the kit those engines can displace about 50% of diesel fuel with natural gas and optimal conditions. However, this displacement rate can be improved with newer technology.

And ideal solution that we believe makes sense economically and in terms of performance utilizes cats tier for dynamic gas blending or DGB engines. These engines offer unexpected displacement rate of about 75% at optimal conditions maximum displacement is rated and 85%. They also have a much better emission.

Profiled and tier 2 dual fuel engines.

Katz tier 4 DGB engine and supported by a mature supply chain and third party expertise fits well with our in house maintenance program and seamlessly integrates with our proprietary fleet automation systems.

With that I am pleased to announce that we have reached an agreement with a large independent E&P company to build a new fleet outfitted with these engines.

We will assemble this fleet and house and it will be ready for deployment and January the agreement offers pricing and utilization levels that will allow us to recoup over 2 thirds of our capital investment over and initial term of 18 months.

The total outlay is expected to be approximately $26 million half of which will be paid in cash this year and the remaining amount in 2022, which will match up against cash generated by the fleet.

We also believe that electric fleets have potential, but the technology and business model is evolving quickly we closely monitor developments and assess customer appetite for these fleets, but it still feels early and we're not yet convinced that the benefits exceed the costs.

Another trend frequently being discussed is for is for the Frac company to just provide electric pumps and not the power generation assets.

Those could be owned or contracted for by the operator.

While this would lower the capital investment for the Frac company the capital for the power generation would still need to be provided by another party or the E&P company itself.

When it comes to electric fleets, we think it's important to consider a couple of additional points first a different source of mechanical power for the pumps does not improve the quality of stages.

For operating efficiencies such as pumping hours per day.

And this is unlike the move to more capable drilling rigs and some years ago next emission from completions activity. Although they are more visible represent a relatively small portion of and E&P companies total emissions.

There are many other ways for an E&P company too.

<unk> greater emissions reductions per dollar spent.

We think that both of these considerations ultimately will limit broad customer adoption at least for the foreseeable future because of the required premium and pricing to justify the investments made by service companies. Despite this as easily technology improves and as economics allow we expect that overtime conventional fleet.

<unk> will be increasingly displaced.

We likely will be a participant with a close eye on emissions and cost per lateral foot outcomes for our customers as well as actual financial results for our shareholders.

We may also test different configurations, particularly those that aim to improve pump design to assess performance.

Another comment that we often hear and the industry is that existing frac equipment and the field is all and will need to be replaced with newer technology and the coming years.

There is nothing about our equivalents performance and condition that would support that sentiment.

With our modular units in house maintenance advanced analytics, and automation and we work to ensure that all of our equipment regardless of the original manufacturer data. The chassis can match the performance of the newest piece of equipment.

We expect the same capabilities efficiency and operating metrics out of all of our fleets as does the customer.

I'd now like to talk about the status of our unique digital innovations that are making a big difference on location, where it counts as discussed on our last call earlier. This year, we announced the successful launch of our fully automated equipment health monitoring.

And control technology this.

And this technology integrates machine IQ or <unk>.

With our in house, Patrick's Frac software and pump control along with other support systems.

This technology has now been rolled out to all of our active fleets. As a reminder, this technology predicts and automatically reacts to pending equipment failures and real time.

Resulting in a consistent velocity that provides the best opportunity to complete stages as designed.

It does this by essentially eliminating mid stage rate disruptions often caused by common fluid and failures, such as cut valves and seats and blown package.

These instances account for over 60% of pump failures during a stage.

The system also assesses and response to other faults such as pending engine and power and failures.

And my Q as a real time equipment health monitoring algorithm when components are nearing and failure the system will neutralize the applicable pump and rebalanced the rate with the healthiest healthiest bumps in the system all within a millisecond.

To our knowledge, we are the only Frac company with automation technology. This advanced.

This technology also improves maintenance outcomes for our equipment by mitigating costly failures and improving safety for our frontline men and women.

We are currently working on another feature that will allow us to achieve design rate faster, let me explain what this is.

Today, when a stage begins the pump operator, and the Frac van ramps up the rate manually selecting our gear and throttle 1 pump at a time.

And it takes time to do this and it has performed somewhat haphazardly. This new feature which we call auto pilot will fully automate the ramp up process, taking into account equipment capabilities and reservoir feedback. We are currently testing it and expect to roll it out and the coming weeks and months.

By automating the entire process getting to design rate faster and maintaining that rate throughout a stage not only improve improves the quality of stages, but also reduces or eliminates excess pumping time.

This allows us to complete more stages for our customer over any given time intervals and.

In addition, as I mentioned on our last call our automation technology as being trained to optimize diesel displacement on our dual fuel pumps. The system, we'll continuously monitor and control the throttle and gear of individual pump units to ensure that they are displacing at their maximum capability depending on conditions.

And then manually this process is dependent on the pump operator, and the protocols built into the OEM kit.

I can't say enough about how competitively differentiating. These technologies are we are confident that our current customers will continue to realize the benefit of our capabilities and prospective customers will want to try F. Tsi and ended up working with us on a dedicated basis customers want perfect stages, and we are on the cusp of delivering just that.

Every millisecond every hour and every day stage after stage.

Lastly, I would like to talk about safety safety on location is extremely important to us and our customers.

As we operate at all time highs in terms of productivity, maintaining a strong safety culture is critical.

Total incident recordable rate for.

And for TR IR was zero point to last year, and a 0.3 year to date.

I'm also pleased to report that we are quickly approaching 4 million man hours with no lost time incidents.

I'd like to give a big shout out to our operations manufacturing and maintenance teams for doing an outstanding job.

That's all I have for prepared remarks, I will now turn the call back over to Jamie.

Thank you Mike.

To wrap up with a debt free capital structure and cash flow, improving we have greater financial flexibility than ever before.

The board and management are considering the best ways to allocate our capital and expect to have more information as the year progresses.

Depending on our cash generation levels and I expect it could include and mix of growth Capex and returns for shareholders.

And as an observation our stock is currently trading at a fraction of the value of our peers, many of which are and will likely remain free cash flow negative.

We also have an excellent liquidity position with cash on our balance sheet, representing 37% of our market cap.

Well I have no doubt biased I think that S. Tsi is a rare opportunity in todays market.

Like to turn the call over to the operator to provide instructions for the Q&A section.

Later.

Thank you, ladies and gentlemen, if you'd like to register a question. Please press the 1 followed by the for on your telephone.

You will hear a 300 on Trump took now that your request for your question has been answered and you would like to withdraw your registration. Please press the 1 followed by the 3.

We are using a speaker phone. Please lift your handset before entering your question once again and that's 1 for to register for a question on free phone for the first question.

We do have a question from day line of.

John Daniel with Daniel Energy Partners. Please go ahead. Your line is now open.

Hey, guys. Thank you for putting me on.

And Mike first congratulations on getting a contract to support the investment on the fleet.

I'm curious if you could provide some color on whether or not.

Is the customer.

Shifting from tier 2 to tier for us it and incremental just any color on on what led them to step up with what the contractual support.

Sure.

It's an incremental move and as you.

There's a lot of talk about these new engines and what they can do for emissions and and displacement rates and.

And so I think just based on this company's ESG goals, they want to test it out and so the rest of the fleets that we have working for them or tier 2 there's no active discussions right now to convert the remaining.

<unk> fleets. This is really more of a test that would say for the customer and and I'm really glad that we were able to get a contract that made sense for both parties.

Okay.

I know you'd mentioned that later on this year and you'll talk about for capital allocation strategies.

As you think about the shift with.

And we're still looking for isn't more permanent losses.

Realistically how many.

Further fleet expansions unfold next year.

Are you talking at the industry level or just for US no talking about utilized.

And they have a bunch of questions, but just there are lead time issues and constraints and so on so we're thinking about it.

And so.

Yes, yes, no understood. So as gene mentioned, we're going to consider capital allocation broadly and really what works best for our shareholders and I think maybe 1 or 2 additional fleets next year is a reasonable possibility. They also will need to be supported by contracts to justify the investment and <unk>.

Keep us and and as positive cash generation mode as we can.

We just haven't quite got to that decision, but something and that magnitude is reasonable expectation based on what I know today, but could certainly change.

Okay.

Thank you very much.

Thanks, Jeff.

We have a question from Stephen <unk> with Stifel. Please go ahead. Your line is open.

Thank you and good morning, gentlemen.

Oh.

Just a couple of things for me.

And I start with as you mentioned the pricing you saw and the second quarter and.

And some guidance for third quarter increases can you talk a little bit about the competitive landscape.

Hearing sort of modest price improvements out there and you guys seem to do that and maybe a little more success and others can you just talk about what youre seeing out there.

And maybe even.

As part of that what your thoughts on it.

On some of the recent consolidation in the space and how do you think that plays out.

Sure So just broadly.

And I think 1 thing that immediately comes to mind when thinking about 2021 is that our our customers. The e&ps are our capital discipline and they are delivering on their capital budgets that they had talked about earlier, the generating a lot of free cash flow.

I think that's a healthy thing for them and what's healthy for them ultimately will be healthy for us.

And so even though we've seen commodity prices move up quite a bit we haven't seen activity move in lockstep. There has been improvements this year, but it's nothing as dramatic as what you might have expected in years past and so I think again that discipline and I think it is going to be serviced well overtime in terms of Oss company behavior.

<unk>.

And there are still a lot of participants.

There are just many companies that are competing against each other I think consolidation is a good thing for the sector I think it could reduce some excess capacity I think it could lead to more economic decision, making so is there have been incremental moves over the last couple of years relatively slow, but we do think that's a healthy.

<unk> move and did on the E&P side, there has been consolidation on the E&P side, and and I think again I think debt is good healthy for the industry overall, so pleased to see it but.

And in terms of second half I'd give some guidance on third quarter, we are seeing some incremental price an improvement a lot of it is cost recovery.

And so glad that were available able to pass those costs through to customers, which makes total sense, but we're still and nowhere near the kind of profitability levels debt that I think would be good for for us and the industry and so we're hopeful 2022, we will see a step up in activity and capital budgets get reset and it will.

And in a great position to capitalize on that and if it occurs.

And if you don't mind you mentioned.

Return profiles of the Newbuild, right, which which sounds very compelling and theirs.

Just curious is that right.

Above your current spot because it seems like the economics of that are our delivering higher EBITDA per fleet and then the existing fleet is now I'm just trying.

And trying to think about how that.

Is that accurate and maybe what that tells you about what price you might be going.

It is accurate and so where we are on a spot basis is.

And so we were just under 5 million annualized EBITDA for the second quarter.

A bit ahead of that for us for third quarter and.

So there's still room for that to move up at this this incremental new fleet and.

And a definitely a different price 0.2 to justify the investment. So that you can do some quick math on that but it's but it's a good contract and glad that we were able to achieve it but what it suggests is that I think there's a place for some of the newer equipment I don't think the market is going to be giant for that at least in the foreseeable future as Ed mentioned.

And then the and the call and so happy for us to participate debt get some of the higher realized pricing but.

And the direction is definitely up into the right as it as it relates to this newer equipment, but I do think day overall scale is somewhat limited today, but just because of economics for the customer.

Yeah.

Great. Thank you and then maybe 1 final 1 so it might be for Lance, but would you think about the <unk>.

Kind of exit rate, how does the potential for beyond at the end of this year.

I mean, you should generally.

Pretty strong free cash flow next year, how do you see working capital could build a little bit but.

Eases.

And any big pieces I should be thinking about as far as free cash flow next year outside of <unk>.

Capex for you just announced and what happens with the working capital moves.

No I think that's really and I mean, our capital structure is simple right now and you know our Capex is what we estimate to be about $2.5 million per fleet and so we do think there is.

And when you get to these levels of EBITDA, we do think thats generating significant a decent amount of cash.

Very good thank you gentlemen.

And as a reminder, if you'd like to register for a question. Please press the 1 followed by the for on your telephone.

And we do have a question from Andy courage.

Webs Creek. Please go ahead your line is open.

Hey, guys nice quarter, and and thanks for taking our call.

I just wanted to ask on the Q3 cadence.

And perhaps any color you can give on on an exit rate type EBITDA per fleet. Thank you.

Sure. So I had mentioned just in terms of cadence in terms of the shape of the quarter.

Little light on the front ends but utilization is improving quite a bit this month and next month. So our exit rate will certainly be stronger than it was and the second quarter, which doesn't really tell you a whole lot.

But you know our exit rate will certainly be higher than the $14 million to $17 million.

EBITDA for the quarter that I that I spoke about earlier, so we will begin in the fourth quarter at that higher level.

Yeah.

And there are no further questions at this time.

Thank you very much operator.

All of you for your interest and we look forward to speaking with you again next time and thanks for taking the time and for your support on the company.

And for today, Thank you bye bye.

And.

[music] growth.

Okay.