Expro Group Holdings NV (XPRO) 2013 Q2 法說會逐字稿

Good afternoon. My name is Brandie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Frank's International conference call to discuss the second quarter results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

As a reminder, this call is being recorded and will be made available for replay two hours after the call and on the Company's website or by dialing 800-585-8367 and entering the conference ID number of 59333435. Thank you. I'd now like to turn the call over to Mr. Al Petrie, investor relations coordinator. Please go ahead, sir.

Good morning, everyone, and welcome to Frank's International's initial conference call to discuss second quarter 2013 earnings. Joining me today as speakers on our call are Keith Mosing, Chairman, President, and Chief Executive Officer; and Mark Margavio, our Chief Financial Officer. Keith will begin today's call with general highlights of the second quarter, and Mark will follow with a more detailed financial discussion of the quarter. Keith will then wrap up with some closing comments.

Before we begin commenting on second quarter results, there are a few legal items I'd like to cover. First, remarks and answers to questions by Company representatives on today's call may refer to or contain forward-looking statements. Such remarks or answers are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These statements speak only as of today's date, or if different, as of the date specified. The Company assumes no responsibility to update any forward-looking statements as of any future date. The Company has included in its SEC filings cautionary language identifying important factors, but not necessarily all factors, that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the Company's SEC filings, which are publicly available on the SEC's system.

Also, you may access both the second quarter 2013 earnings press release and replay of this call on our website at www.franksinternational.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 in the second quarter 2013 earnings release which was issued by the Company yesterday. I will now turn the call over to Keith for his conference.

Thank you, Al, and good morning, everyone. What I'd like to just say is we had a record year last year. This year, we have been in business 75 years, and we're here to discuss our second-quarter earnings, and I'm pleased to say we had a record year last year. We are exceeding, and it looks like we are on the possibility of having another record year. And so this is mainly because of increasing demand offshore as well as land. The land work has -- rigs have -- down slightly, we are seeing an increase here in the third quarter, so we think that's a very positive note.

Our international customers as well as our US customers are poised to continue with their activity. Some of the biggest increases have been in our pipe end products. Just to give you a little example, we went from $24.5 million to $56.5 million on our pipe end products. This is primarily due to pipe sales around the world. And we're looking forward to our new position as a public Company, which will give us all the benefits that we had planned, and it looks like the customers are supporting us very much. And we are in line, like I said, for another record year. So at this time, I'll turn it over to Mark, and he will review all of our finances for the second quarter.

Thank you, Keith. I'm sure you saw our earnings release yesterday and that we will be filing our 10-Q with the SEC after this call. Our financial results for the second quarter were consistent with the capsulated information presented on page 7 and the IPO prospectus. Here's a brief overview of the quarter's results of how they compare to the second quarter of 2012.

Total revenue for the quarter was $293 million, which reflects an 11.5% increase over the prior-year second quarter of $262.7 million and a 26% increase over Q1 2013. This is the highest revenue quarter in the Company's history. Net income from the continued operations was $101 million, which reflects a 13.2% increase over the prior year's $89.2 million and a 41.6% increase over the first quarter of 2013. Adjusted EBITDA for the quarter was $128.1 million, a 10.9% improvement over the $115.5 million generated in the prior year and 29.3% from the first quarter of 2013. This was also a new record for the Company.

Finally, we reported income of $141.9 million for the quarter, which included discontinued operations of $40.9 million, $39.6 million of which came from realized gain on sale of a component of our pipe and products segment. This business manufacturer centralizes the sales to third parties and was sold on June 14, 2013. Second quarter EPS from continuing operations was $0.85 per share compared to $0.75 per share last year based on 119 million shares outstanding. After the IPO, we had 206.5 million shares outstanding on an as converted basis, and our EPS on a pro forma basis will be approximately $0.46. The effective post-IPO share count and tax impact will be fully recognized beginning in the fourth quarter of 2013.

The improvements in our results year over year was primarily attributed to the increased demand for our services and increase in our international pipe sales. Our services revenue increased 7.8% year over year. Our pipe and products sales increased 29.5% on a roller base. The increase is predominantly due to the delivery of a large TLP order in international pipe sales to existing customers.

Sequentially, our second-quarter results were even more impressive, with total revenue increasing 26% and adjusted EBITDA increasing 29.3%. Much of this improvement is due to the relative weakness of our first-quarter 2013 that was negatively impacted by the [bulk] issue in the offshore of Gulf of Mexico which caused delays for our customers in the first quarter. Those issues have since been addressed, and our second-quarter results in the Gulf of Mexico were quite strong. Our on-shore casing business in North America continued to reflect the current soft market due to lower natural gas prices that characterized the region in the first quarter as rig and well count levels continue to be flat to lower versus the prior year. Our international operations were very strong and were driven by increased revenue from our existing customers.

Our overall EBITDA margin of 43.7% remained consistent with prior year despite a decline in our international services segment due to increased staffing levels and management, currency exchange costs, and bad debt expense. While currency was not a significant factor in the quarter results, we were negatively impacted by the strength in the US dollar. Only about 25% of our revenue was invoiced and other currencies. We did have a slight reduction in income tax expense for the quarter which reflects a change in the mix of earnings between the US and other countries. However, in future quarters, we anticipate showing an effective tax rate between 25% and 27% depending on the mix between the US and international sources of income. Our financial results will be fully impacted by the change beginning with the fourth quarter of 2013.

A few comments on the balance sheet. We closed the IPO, including shares issued pursuant to the over-allotment of August 14. Consequently, we sold 34.5 million shares in the offering for net proceeds of $712 million. We used a portion of these proceeds to repay in full the outstanding notes with the remainder of the proceeds now on our balance sheet. None of these transactions are reflected in our reported second quarter results.

Following the offering as of August 31, Frank's International had approximately $500,000 of debt outstanding and approximately $400 million of cash on hand. Concurrent with the IPO, we entered into two revolving credit facilities. One of the facilities is a $100 million revolving credit facility that will mature in August 2018. The other facility is a $100 million revolving credit facility that will mature in August 2014. Subject to the terms of credit unions, we have the ability to increase the commitments under facilities by $150 million. As of today, both facilities remain undrawn.

Our 2013 capital expenditure budget is $200.3 million, of which $164 million is for the purchase and manufacture of equipment and $36.3 million is for the purchase of construction facilities. Our budget does not include any provision for acquisitions. For the first six months of this year, we have invested $87.5 million in CapEx primarily for revenue generating equipment for future deepwater rig deployment. All of our capital investments were funded from internally generated funds, and the remaining net proceeds from our IPO together with cash flow from operations and possible borrowings out of our credit facilities should be more than sufficient to fund our CapEx requirements for the remainder of 2013 and 2014. We expect to declare a dividend of $0.075 per share for the record date, November 29, with a payment date of December 19, 2013. I will now turn the call back over to Keith for some final comments before we open up the call to Q&A.

In closing, I'd like to thank all the people who assisted Frank's with our recent IPO. This includes our lead underwriters, call managers, attorneys, consultants, and everybody on our management team worked very, very hard to complete everything that we did. I must admit it went a lot smoother than I ever anticipated, and we met a lot of nice people along the way. It's made Frank's International a lot stronger Company. We added financial muscle and flexibility so we can grow organically and pursue acquisitions and expand the Company and our current services and products that we offer. We welcome our new shareholders and look forward to continued regular communications with you and our team of sales-side and analysts. Quarterly calls and future conferences and one-on-one meetings. Again, thank you very much, and Al, I think we are ready for any questions anybody might have.

Thank you.

(Operator Instructions)

Thank you, Brandie. I wanted to let everyone know that we also have John Walker, our VP of International Operations, and Mike Webre, our VP of Engineering with us today for questions as well. And participants, please limit your questions to one and a follow-up so we can try to get everybody in queue. Thank you.

Jim Wicklund, Credit Suisse.

Yes. Thanks for all of this. Can you do me a favor? Can you walk through the CapEx again for the quarter, expectations for the year and the breakdown? I just wanted to get a clear understanding of where the CapEx is going this year.

We have a $203 million of CapEx that we expect for this year. It changed a little from last year in that we have about $10 million that we spent on building so far, and we haven't done that yet. Most of the revenue we anticipate going to operating -- revenue generating equipment, and approximately $36 million of it is to building and facilities.

And where the building and facilities, is that somewhere around the deepwater area in foreign countries, or is this all pipe yard in Louisiana?

It's both.

Okay. Thanks. Appreciate it.

Ian Macpherson, Simmons and Company.

Thanks. I think a nice aspect of your second quarter was the margin improvement in your US services to 51%. And Mark, I think you mentioned that you still are seeing fairly anemic contribution from your land business in the second quarter, which is improving on a leading edge basis in Q3. So can you comment at all on what your visibility is for your US margins in the second half of the year, given that at least somewhat of an improvement on the land side?

Right. I think we anticipate that the offshore Gulf of Mexico will increase in revenues for this quarter, third quarter, which will positively impact our margins. Land still remains flat to up in most of our locations, so we are seeing a little more positive in that area at this point.

Okay. And then in the -- on the product side, the quarterly results tend to be a little bit lumpier, it seems, but if we look back at the first half of last year, you derived about half of your EBITDA for the full year in the first half, even though the quarters weren't necessarily even. How much visibility does that business have one or two quarters out, and can you talk at all about the growth prospects in the second half for product as well?

We're seeing a fairly significant expansion in the sales in our international markets. That's been probably our biggest driver. We did complete a couple large load outs in the second quarter as well in the US. But in general, the expansion is from international. And we expect that to grow over the next couple of years. It's a little difficult to give you a projection at this point in time because delivery times change, and we recognize the revenue at the time of delivery.

Well, thank you, and we'll look forward to seeing what unfolds in the second half. Thanks.

Robin Shoemaker, Citi

Thank you. I wanted to ask, Mark, you mentioned in the press release that after the IPO, you're going to be reporting a noncontrolling interest. And so what should we expect the third quarter to look like in contrast to what we see here?

As far as -- there's two major impacts that are going to happen to the financial results. Number one, we're going to have more shares outstanding, which will reduce the earnings per share. The second thing you're going to see is that we're going to start August 14 accruing the taxes as a public Company, which will be greater than it's been in the past, of course. So those two things will impact earnings per share. Just to kind of gives you an idea, the earnings per share will be about -- assuming that was all in full swing now, it will be in the fourth quarter, the earnings per share would be about $0.46 a share. It would be a similar number for us. As far as the minority -- the noncontrolling interest, it's not really a very complicated calculation, but just make sure when you're looking at the numbers you're looking at net income. You would use the entire -- before the noncontrolling interest, the entire 206.5 million shares outstanding, and after noncontrolling interests, you want to use the 153 million shares.

Okay. Thank you. Could I ask also, since you do have now $400 million of cash, no debt, you're obviously in a very strong position to both grow the business and make acquisitions. I don't expect you to indicate what kind of acquisitions, but you've got equipment and services and a broad geographic footprint already. So is there any kind of general direction where you would -- you could tell us where you would like to grow?

This is Keith Mosing. What we would like to do is -- and as you recognized the global footprint, and I think what's important is to stay focused on basically what we do, but add any kind of tangible products or services that we can. It would be my favorite to buy or acquire something that would be here in a local point that could be redistributed around the world. Whether its something we acquire overseas or we develop in-house. And we are spending a lot of time and effort developing products and services in-house that can be spread all over the world also.

We've only been out of the box now for about 5.5 or 6 weeks. But we're very eager -- and like I said, we have been in the M&A business for a long time. We've made over [50] in the last 30 years. So we're going to stay focused. Right now, multiples in trading are quite high. And we're not going to just jump out there and blow a bunch of money just because we have it.

Understood.

More to be coming.

All right. Thank you.

Blake Hutchinson, Howard Weil.

First of all, you mentioned in the release some allusion to royalty payments. And I was just hoping to get some information or insight into how these can impact you on a quarterly basis and the variance and whether they're on kind of a usage-based payout or kind of annual contracts, any color you can give around that would be welcome.

John, why don't you answer that?

Good morning. This is John Walker. As far as royalties, we set up within the industry a safety device from an inter-locker basis, and we royalty that out. And it's going to continue thereafter for an indeterminate time which are substantially far out. So just a report from a reconciliation that recently occurred, and we can see that to be continuing on a go forward basis.

Okay, great. So that shouldn't be any variance going forward. I appreciate that. And just following up on Robin's question, understanding the differential between kind of the reported number before the noncontrolling interest and after, is it your -- I guess what should we be focused on or what would you call the analytical community's attention to in terms of what we will be reporting going forward as the headline number, what we should be recording as the number to the reporting agencies?

Well, are you talking about earnings per share or which one?

The EPS number. Should we be more attentive in future quarters as you release to the number based on the fully diluted share count, or will you guys be using the number adjusted for the noncontrolling interest as your headline number?

I would say we use a net income number before the noncontrolling interests.

Okay.

The biggest thing to be aware is the taxes in the past have been paid by the shareholders. And now it will be corporate income tax. That's probably the number one biggest impact to the change for the US. And the second piece, of course, is the IPO dilution. So be aware of those as well.

Sure. I get the mechanics, I just wanted to make sure you call attention to what we should be paying attention to. So I appreciate that and we'll use the fully diluted number then. Thanks, guys. That's it for me.

(Operator Instructions)

Okay, Brandie. I assume there are no further questions.

Where is everybody?

There are no further questions.

Thanks everyone for joining us today.

Wait. Brandie, did you get another question?

Jim Wicklund, Credit Suisse.

Thanks, guys since nobody else was around, thought I'd try again. Have we seen any shifts or changes in market share or costs in the deepwater over the last couple of quarters? Any change in competition?

Jim, this is John Walker. As far as the market share, we are maintaining our market share with a slight penetration, but as you know, the market is substantially increasing. And the 100 new drilling rigs are coming out from now until the end of '15. We are well-positioned to take that surge. We've invested some CapEx, $165 million for this year, we are on track for $87.5 million for the six months on deliveries so our manufacturing group has certainly kept up with that demand. There would be a struggle, we talked about it on the road show, the Wood and Mackenzie report, 39,000 people short within the industry.

Those 100 new drilling rigs that are coming out are going to require a headcount of 25,000 people. So there is going to be a dilution within the industry, of expertise. This, we believe, puts us in a good position because we focused our efforts on mechanization. And the mechanization with the sixth generation rigs is a good fit for us. Moving people away from well center, out of harm's way and also allowing the operation to efficiently transition from an auxiliary mass operation to a drilling operation.

So we are maintaining the market share, and we are certainly going to see an upsurge on the deepwater arena. And the CEO conference last week in New York, you saw the general consensus that all these new drilling rigs are coming out, but there's only 16% of the drilling rigs that are coming out are actually working in the ultra deepwater segment of the market at the moment. And that's good -- we believe that to be good for us because we're in a substantial portion of that market. But the remainder of the 131 drilling rigs in that sector are actually working in the deepwater sector. And we have a significant presence globally in that sector also.

So we continue to focus our energies on the technology, the applications, we are harvesting good free cash flow as a result of that. And we see that as a good potential going forward. This is a great moment for our Company. And the record results, and we see it for third-quarter, there's no reason that we couldn't be in with the budgeted forecast.

John, that's very helpful. Let me follow-up. The $165 million in new equipment, you mentioned that it's basically for rental equipment. Can you write down for us how much of your CapEx this year is going to be maintenance? And when we talk about rental, this is equipment tools that you're manufacturing that will be put on rigs and generate rental income even when it's not being actively used?

Sure. Traditionally, our maintenance CapEx has been between 5% and 7%. And the remainder would be for growth CapEx, and the way in which we've done this, we have invested substantially from last year and this year, and we see that the '14 numbers based on current market sentiment would be something traditional to what we're doing in '13. Now, I would say after that, we should see a substantial reduction in our CapEx as we then start to go into utilization. So as far as the revenues, you are talking about revenues, the revenues from a standby perspective, we don't see any price pressure at this point.

Okay. Thank you very much, gentlemen.

Okay, everyone. Thank you for joining us today, and we look forward to talking to you further and seeing you at the upcoming conferences.

Thank you. This concludes today's conference. You may now disconnect.