Q2 2019 Earnings Call
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Quarter 2018, Frank's International <unk> earnings Conference call.
My name is Sylvia.
Operator.
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At this time all participants are not only mode. Later, we will conduct a question and answer session.
Trying to question.
If you have questions.
Sorry, I had one touch talk.
Please note that this conference is being recorded.
I would now kind of color Eric.
Aaron you may begin.
Good morning, and welcome to the Franks International Conference call to discuss second quarter 2019, earning.
<unk> director of finance and Investor Relations.
Turning to slide two I speakers on todays call, we have Mike Carney, Chairman, President and Chief Executive Officer, and Olympic <unk>, Senior Vice President and Chief Financial Officer.
Joining like in all affected you any portion of today's call. Please <unk>.
Hi, Matt tubular running services.
Michael Reiki, President XI peering and Scott Mccarty [laughter].
I, probably should have been picked it on our website at <unk> breakeven rockets call.
Maybe if I could your application he's got the investors section on our website at Franks International Dot Com.
On today's call Mike will take you through Nokia this quarter.
I'd like to highlight.
Well, Mike I will then review the financial performance of the quarter and aircraft <unk> action.
Before we begin commenting on our second quarter 2019 without.
Very few people item I'd like to cover beginning on slide three.
First remarks and answers to your question I Company Representatives on today's call may refer to or contain forward looking statements.
Such remarks or answers are subject to bear.
Certainties that could cause actual results to differ materially from those expressed or implied.
Such statements speak only as of today's date or if different as of the date appetite.
The company assumes no responsibility to update any forward looking statements as of any future date.
The company has concluded and SEC filings cautionary language identifying important factors that could cause actual results.
Be materially different from those set forth in any forward looking statements.
A more complete discussion of these risks is included in the Companys ATSI filing maybe accessed on the SEC website or on our website at Franks International Dot com.
Please note that any non-GAAP financial measures discussed during this call are defined and reconciled and that's directly comparable GAAP financial measure in the second quarter 2019 earnings release, which was issued by the company earlier today.
I will now turn the call African mines.
Thank you and we appreciate everyone joining us today for the call.
Ranks excellent second quarter results highlight our differentiated market position, which has driven both top and bottom line improvements.
We are seeing increased customer spending in key markets.
And are continuing to experience growth through market share gains and improved pricing.
The company's focus on customer service and developing industry, leading technology has been key to improving our financial results.
Turning to slide four and the summary of our results in the second quarter, we generated 156 million revenue, which was up 18% from the second quarter of 2018, it up 8% sequentially.
Adjusted EBITDA was 17 billion in Q2 and $27 million for the first half of the year.
Demonstrating a first half year over year incremental margin of 34%.
In the second quarter, we generated positive free cash flow for the first time since the third quarter of 2017.
We are dedicated to entering the market recovery in a position to improve returns on capital and optimize free cash flow.
Now I'd like to review some of our segment and technology highlights in the quarter.
Turning to slide five the Trs segment second quarter revenue increased 16% from the prior year and 9% from the prior quarter.
Increasing customer activity in key markets, such as West Africa, the us Gulf of Mexico, The Caribbean and Asia Pacific drove our top line improvement.
It is also worth noting that the second quarter was the 12th consecutive quarter of growth in the us land market for the Trs business.
This was achieved despite the recent decline in rig counts.
Our technology accomplishments in the Trs business were noteworthy this quarter.
We were awarded the 29 team Hearts NP Meritorious Engineering award in recognition of the Trs patented collar load support system.
This technology is the industry's only true non marketing tubular handling system for corrosion resistant hours.
It's a prime example of the company's relentless focus on safety, removing both our personnel and those of our customers from the Red zone on the rig floor.
With this technology operators can rack stands of tubing in the Derek while off the critical path.
In addition to enabling safer operations the collar load support systems substantially reduces runtime.
While simultaneously, increasing well integrity and the life of the well.
Another example of our technology, creating value for customers is in Azerbaijan.
While working with a major operator, Frank's deployed its intelligent connection analyzed makeup to or I can.
This technology uses machine learning and big data analytics to learn from historical data and make recommendations for optimal makeup in connection integrity.
Our Cam system provides connection analysis more reliably accurately and with less personnel than any other system available today.
This job was performed with 100% accuracy in Dispositioning over 2500 connections significantly reducing the tubular installation time.
Turning to slide six the tubular segment second quarter revenue improved more than 30% year over year and 20% sequentially.
Recall this segment contains two businesses.
The first is our tubular product sales business, which is large diameter conductor in surface casing and connectors.
The second piece of this segment is drilling tools.
Which is designed to optimize drilling performance.
The tubular product sales business experienced strong growth in the second quarter.
Due to higher demand in the us Gulf of Mexico, and the large tubular order from a customer in Mexico.
Drilling tools revenue also increased sequentially due to increasing customer adoption of our product suite.
The drill string torque reducer or DSP are illustrates is and has been adopted the solution of choice for several customers on deviated wells and re entry work.
The DSP are also improve the integrity of the well under severe downhole conditions by reducing pacing where.
In the second quarter. The tubular segment also successfully completed field trials on two new technologies, the DPP are and the data logger.
The drill pipe tore producer or de PCR is a modular clamp on tool.
Similar to the DSP are.
In that it is also used in deviated wells that are experiencing excessive rotary torque and casing where problems.
And the data logger is a downhole drilling sensor package that allows data to be reported throughout the drilling operation to document the effectiveness of shock absorption and vibration mitigation.
The data logger represents additional functionality of our existing harmonic isolation tool.
While our drilling tools business is a relatively small piece of the total Franks portfolio. Our customer feedback is extremely positive and we expect this business to have a robust growth trajectory going forward.
The cementing equipment segment as shown on slide seven posted revenue of 27 million, an increase of 14% compared to the prior year and essentially flat compared to the prior quarter.
International expansion efforts continue to progress with new work awarded in the quarter in the Black Sea West Africa, Mexico and Asia Pacific.
This progress may not be readily evident in our results.
As we had some international projects finished during Q2 with follow on work pushed out later in the year.
Given that this segment is still in the early stages of international expansion, we expect some lumpiness in the results as project start and completion times fluctuate.
A good example of the international traction in this segment is in the Caribbean market, where our cementing equipment business has moved staff and products into a joint base with our Trs business the Caribbean as one of our strongest markets and we feel this combined go to market approach will drive an improved sales effort.
As you may recall, a significant part of the rationale of acquiring our cementing equipment business was to roll out their technologically superior products through the Franks International footprint.
It has taken longer than originally anticipated to tweak the tool designs for certain international markets and obtain the required international certifications.
The good news is that all of that work is behind us and these industry, leading tools will be available and even more markets. Starting later this year, most notably the north sea.
Overall, our cementing equipment technology is expected to be utilized in over 20 international locations in 2019, our skies of technology enhances the wireless submit head offering and it continues to enjoy strong adoption.
It is now being utilized on almost every submitted job we perform in the Gulf of Mexico and has been utilized in six countries outside of the U.S.
And Scott I hope will be deployed into additional international markets over the remainder of the year.
This technology has been recognized as the best practice by many of our customers because it embodies our core value of safety due to its remote operation.
Skyrocket eliminates trips up into the dare to connect submit lines by our employees or those of our customers.
So on a company wide basis, the market outlook for each of our businesses is positive for the second half of the year and we are encouraged by the relative stability of oil prices and improving deepwater rig counts.
As we look to the remainder of 2019, our plan still calls for 15% year over year revenue growth and an approximate doubling of adjusted EBITDA.
I would now like to introduce you to Melissa Kubow. He joined the company as Chief Financial Officer, two months ago.
She brings over 17 years of oilfield service experienced Refracs, most recently as CFO at Nesser prior to Nesser. She held several senior level finance and accounting leadership roles at Ensco She's been a great addition to Franks and will play a significant role in leading us to higher returns on capital and free cash flow generation Melissa.
Thanks, Mike It is an honor and pleasure to have joined the Franks team.
My first few months have been fruitful and immensely education.
And I have developed a new commerce back that unique position Frank's occupies in our state and the committed workforce who are devoted to the presentation.
And looking at the quarters financial results, we are reporting revenue this quarter and $156 million.
Our top line has grown 8% since the last quarter and 18% since the year ago quarter, driven by better than expected growth in our Trs offshore business as well as a large tubular product sales order completed during Q2.
And looking at adjusted EBITDA, We finished the quarter reporting $17 million.
Which is at 78% sequentially.
Our business is generating strong leverage from our topline growth.
As a reminder, in Q1, there was a onetime insurance charge of $2.5 million.
And looking at our first half collectively we are seeing incremental margins of 34% year on year and tailgate that this trend should continue and improve going forward.
And turning to cash burn, which is at the forefront of our mines and our investors mind. We ended Q2 2019 with $173 million in cash and short term investments, which was flat to the first quarter of 2019.
Our free cash flow generation totaled $3.3 million for the quarter and this reflects our first quarter positive free cash flow in 2017.
We are focused on managing working capital requirements through the remainder of the year with a large focus on reducing our dsos.
We do expect to continue to generate free cash flow for the remainder of the year.
We spent approximately $9 million on capex in the quarter, which continues to be in line with our expectations of approximately $40 million total spend for the year.
Our investments are being made strategically on products and technology that we believe reinforce our strong position in the market and where returns on capital makes sense.
Much of our capital for the year and committed and we see cash generated in the back half of 2019 as devoted to paying for those expenditures as that equipment is received.
And looking at our performance for each segment, our tubular running services segment showed the strongest performance with revenue of $107 million, which was up 9% from the first quarter and 16% from the prior year quarter.
Offshore markets and the Caribbean Africa, and the US Gulf of Mexico continued to improve for the segment.
And we also picked up additional market share in the Asia Pacific region.
This segment is showing the strongest offering an incremental margins with adjusted EBITDA of $25.4 million in the second quarter.
Lower manufacturing costs in the quarter aided the adjusted EBITDA performance. In addition to the leverage on higher sales.
We expect a range of 40% to 60% incremental margins in this segment going forward.
And looking at to our tubular segment revenues of $22 million were reported in the second quarter. This is up more than 30% from the year ago period, and 20% from the first quarter of 2019.
As a refresher in this segment, we have two different components.
Tubular products sales and drilling tools, which have very different margin profile.
Based on the mix profile or sales in any given period, the adjusted EBITDA margins will fluctuate.
Adjusted EBITDA for the tubular segment were $3.9 million showing a slight decline over the prior quarter driven by the mix of higher Cubiware product sales.
On a year over year basis, adjusted EBITDA improved 18% and we feel this trend will continue in the back half of this year.
We feel strongly that our investments and nurturing that business are paying off as our drilling tools portfolio continues to have meaningful revenue contribution with good market penetration that we anticipate will accelerate in the second half of this year.
Mike spoke earlier about our DPR.
D. S. T R and we are excited about the opportunity detour in conjunction with diversified technology bring.
Our cementing equipment segment continues to see international expansion progress and good market penetration.
The second quarter revenue of $26.7 million reflects a slight decline over the prior quarter, 3%.
But a year over year improvement of 14%.
The sequential decline was primarily driven by the timing of projects internationally for certain projects were completed during the second quarter and follow on work is expected to begin during Q3 or Q4.
Partially offsetting this has been an uptick in downhole service tool work and the start of the Gulf of Mexico Hurricane season, as both an increase in the headwear and while construction side.
Adjusted EBITDA for the segment were $3 million this quarter, which reflects a 20% sequential reduction.
Our results in the existing project completion, and new project delays occurring as were from incremental indirect expenses that we have committed towards our international expansion efforts.
Despite the lower performance this quarter buyer cementing equipment segment, we continue to see green shoots occur.
And new work has been awarded for this business in many jurisdictions.
Mike also mentioned the share presence of cementing equipment operating alongside our Trs business in the Caribbean.
We continue to be enthusiastic about the strategic fit of these projects and services in our portfolio and expect to see the results of our efforts in future quarters.
The impact of our corporate component to adjusted EBITDA in the second quarter with approximately $15 million.
In the second quarter, our expenses were slightly higher than anticipated as we had some higher medical insurance expenses for our us employee base.
It's an incremental professional services fees.
We expect the corporate adjusted EBITDA impact to come down in future quarters.
We continue to expect the full year 2019 financial results to show consolidated topline revenue growth of at least 15% incremental adjusted EBITDA margin to be in the range of 30% to 50%.
We remain optimistic about our ability to capture work during the offshore recovery and to execute that work with excellence.
Total company Q3 revenues are expected to be modestly up sequentially as our international cementing equipment expansion continues.
Adjusted EBITDA for Q3 is expected to be in line with the second quarter. During this coming quarter. We will begin our process of looking forward towards 2020, and we will update the market on our view after that time.
With that we will open the call to Q any operator.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one just touched helpful.
To be normal Mchugh, please press the pound or the hedge.
Can you maybe speakerphone, you may need to pick up the first question the numbers.
Once again, if you have a question. Please press star one touch Tom.
And our first question comes from Sean Meakim from JP Morgan.
Thanks, Good morning.
Morning morning.
So maybe to start I was hoping you could just talk about how you're seeing.
Changes in competitive dynamics, so thinking first.
International offshore markets.
Yes, many of your competitors one its going through.
Appeared to transition and so as the markets improving.
How are you seeing changes and competitor behavior and then maybe you could just contrast that in the us where.
Lots of small competitors much more fragmented marketplace at a more challenging near term outlook in terms of.
Activity, let me just to get an update on on competitive landscape will be helpful. If you don't mind.
Sure I'll kick it off and then.
Turn it over to some of our business unit Presidents, we've got here.
Turning to the competitor profile.
We are in a very competitive market and we have as you know on the Trs Soc, one large competitor, but when you go into individual markets are usually a handful of smaller.
Sometimes local competitors that can be quiet.
Quite good and strong competitors so.
The competitive landscape landscape is still competitive.
I think we have picked up market share.
Selectively for a couple of reasons one is we're really pushing our higher technology offerings.
And secondly, and this gets to sort of the people plank of our strategy. We've invested a lot of money in sales training over the course of this year and I think we may be starting to see the beginning results of some of that training that we've we've had our salesforce Burke.
I'll start by turning it over.
Dave on the Trs side, maybe get a little more granular on there on the Trs competitive situation.
Yes, Thanks, Mike.
As Mike mentioned here, we do believe we gained some market share on the international markets.
We have some capacity and ability to deliver to projects as they come up and we think thats attractive to the clients.
On the.
The U.S. line side, obviously, we've the markets seeing some some headwinds coming.
We have been growing in us land now.
12 consecutive quarters, and we believe thats, primarily a function of.
Quite wide footprint, and our ability to redistribute resources as individual basis pick up and drop.
The other thing we have seen as a trend here is is the big Guy as sees coming into US land, we've seen that as a as an opportunity for us to pick up those clients and again.
We believe they have an interest in our technology portfolio in us land, which differentiates us from some of the smaller competitors out there.
Yes.
Scott Mccurdy, let's say for the imaging equipment business.
I think we're a new entrant on the international offshore markets. So a lot of it is proving our technology and.
Basically the value of our tools and as rig rates go up that value goes up because of the efficiency.
And then safety benefit.
But one of the things I would say.
I think we are we're changing the competitive dynamic because as we come into a contrarian we work for a new customer that customer operates in multiple different jurisdictions that word is spreading and we're seeing good adoption of our tools within a customer around the world.
Correct.
Very positive.
Sign for us.
Yes. Thank you.
Nigel Lakey I want to Echo Everybodys comments, but I think Mike identified a principal issue here, we have better customer engagements than we've had in the past variable to get the voice of the customer understand their challenges and to Scott's comments, particularly rig costs are now very very much foremost in our customers' minds, so where we improve efficiency, where we provide some technology differentiation and saw some customers problems I think that very much sets us apart from the other players in this business.
Well. Thank you for all that detail I appreciate all the different perspectives.
Mike I was hoping you also just maybe drill in a little bit more into.
The opportunity set for Trs, specifically and Latin America, as we look to maybe into next year and the here beyond that I think historically, Brazil as the market you guys are focused on too much just given pricing and margins have been more challenging in that market, but.
With Icees potentially.
Looking to ramp up activity next couple of years.
The success that we've seen and Guiana Suriname.
Along with even the Mexican side and the golf looking better just maybe how you look at the broader Latin American opportunity set next couple of years.
And.
How that could contrast, with how you participated and Latin America historically.
Let me start with Brazil.
Petrobras historically has of course been the.
With a significant player in Brazil, if you look at the rig data, though and the forecast going out two to three years, you can seem to Petrobras. So the rig forecast for Petrobras going down there for the Io sees going up and Thats. Good news for US Petrobras is a very very tough on its vendors price wise.
And I think the.
Affect on Petrobras, though we do have an opportunity to bring in some of our specialized tools to try to upsell and kind of get into the Petrobras story of that way.
On the iOS sees.
We work for them in many locations over the world. So all over the world. So we've got.
We've got a good route to try to sell our story to the diocese that are ramping up.
In Brazil.
Other parts of Latin America, the Caribbean is very strong for us and the Mexican side of the Gulf of Mexico is increasing also but I'll turn it over to Steve If you want to provide a little more color on Latin America.
Yes, Mike I think the Caribbean market for US has been dominated by the growth in key on or in the adjacent countries, where we've had a first to market advantage and that's been a good growth story for us.
I think the story line on Mexico, and Brazil both.
Io sees accessing that the deepwater market, which is a sweet spot for us so we see them as opportunities going forward.
Thank you appreciate the feedback.
Our next question comes from Byron Pope from Tudor Pickering Holt.
Good morning, and.
Congratulations on the site.
The.
Just wondering micro Melissa I realize the businesses nationally lumpy from quarter to quarter, but as I think about the Q3 guidance as a result of slightly sequentially and implies topline a degradation in Q4 and so just wondering if you could provide some incremental color and context on where that thats, just the timing of projects and one or more of the business segments and then.
But again any context, there would be helpful.
Yes.
Good comments.
Barton.
Very observant on your part, but if you take a straight 15% revenue growth.
And then you look at our first half.
The implication is that our.
Our revenue is going to be.
If you say flat in the third quarter and definitely implies.
Fairly significant downward tick in the fourth quarter and Thats really not our that's really not our expectation so when we say.
15% year over year revenue growth, that's really a bare bones minimum, but I'd have to say I'd be very disappointed. If all we did was was that because that were that were targeted to 600 million revenue for the year.
So.
Look at the 15% is kind of a low watermark, it's not really our current expectation.
So I don't know if that helps but we we certainly think that the second half of the year.
Revenue because we do have some projects kind of winding off in Q3, we we've picked that are kind of minimum would be flat revenue in the in the third quarter of course, but that would imply area pretty strong fourth quarter. So that's that's kind of the trajectory that that I personally see is flattish third quarter at a pretty good bump up in the fourth quarter, Yeah, I'll hand that would get us over the 15% Bogey services. In addition to what Mike said, maybe some additional color around the Lumpiness. There's there are several things that can drive out top line. The tubular product sales and these tend to coincide with if you will a customer delivery dates to where our customer pushes out well, even a month or two if that trips a quarter that can that can move our top and bottom line pretty meaningfully in one of our segments.
So when we look forward, we see additional growth trajectory in total for sure.
And I think as we look at our at what I'd say is our burgeoning market segments being.
The tubular segment as well cementing when we look quarter over quarter, we may see a projects slip and that created that can be meaningful impact to that segment in a particular quarter, but when we look overall at the landscape. We see very good growth trajectory. So I might suggest that when we're looking at key retailers and we're looking at cementing, we're looking year over year and sequentially, but year over year in the total trajectory is very important.
And then when we're looking more at Trs, we're looking more sequentially as to how we're we're continuing to move forward.
I'll wait up into the right to the Trs business.
That's really helpful. Thank you both I'll leave it at that.
Thanks Mark.
Once again, if you have a question. Please press star one touch telecom.
We have no further questions at this time I'd like to turn the call over to Mike Kearney for closing remarks.
Thanks overview, so to conclude we expect a solid second half of 2019.
And have an optimistic outlook for the continued offshore recovery ended 2020.
We continue to evaluate ways to improve our operational and financial performance to drive higher returns on capital and free cash flow, we look forward to keeping everyone apprised on our next call.
Thanks for your continued interest in Franks International.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.