Expro Group Holdings NV (XPRO) 2013 Q3 法說會逐字稿

Good morning. My name is Hope and I will be your conference operator today. At this time I would like to welcome everyone to the Frank's International third-quarter fiscal-year 2013 earnings conference call. (Operator Instructions) Thank you.

Mr. John Walker, Vice President of Finance and Investor Relations, you may begin your conference.

Good morning, everyone, and welcome to Frank's International conference call to discuss third-quarter 2013 earnings. I'm John Sinders, Senior Vice President, Finance and Investor Relations; and joining me today on our call are Keith Mosing, Chairman, President, and Chief Executive Officer; Mark Margavio, our Chief Financial Officer; and John Walker, our Vice President of International Operations.

Keith will begin today's call with general highlights of the third quarter. John will provide an overview of our operations, 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 on third-quarter results, there are a few legal items that we would like to cover. First, remarks and answers to questions by the Company's representatives on today's call may refer to or contain certain forward-looking statements. Such remarks or answers are subject to risk and uncertainties that could cause actual results to differ materially from those expected or implied by such statements. Such statements speak only as of today's date or, if different, as of the date specified. The Company assumes no liability 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 forward-looking statements. A more complete discussion of these risks is included in the Company's SEC filings.

Also, you may access both the third-quarter 2013 earnings press release and a 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 measure in the third-quarter 2013 earnings release which was issued by us yesterday.

I will now turn the call over to Keith for his comments.

Thank you, John. Everything operationally has performed well, as expected, especially the offshore Gulf of Mexico. We grew at 43% last year; this year we're going to come in maybe flat, but still ahead of last year. So that will be two record years in a row for our history.

We are performing well. Our outlook is well. Business is strong, and I think Frank's will continue to be a dominant player in the market. Now I'll turn it over to John Walker, please.

Thank you, Keith. We continue to invest in the Company, design and build new equipment to add to our rental tool inventory. For example, last quarter we designed and built in six weeks a mechanized tong package which integrates with a specialized iron roughneck.

This equipment, along with our [supply trade] handling tools, allowed us to win a contract on a drillship in New Zealand, which is scheduled to begin work in Q4. This is just one of the many examples how we believe Frank's unique engineering capabilities gives us a strong market position worldwide.

We strive to maintain and increase our market share where it makes financial sense. All of the data that we have seen and the conversations that we've had with our customers point to continued opportunities and ultimately growth for the Company.

Looking at the business segments, International Services revenue for external sales decreased slightly sequentially and 5% year-over-year to $122 million. Adjusted EBITDA margin was 40% of the external sales.

Included in these results is the previously mentioned $8 million in bad debt reserves. Without this reserve, our adjusted EBITDA margin would have been 47%.

The International offshore business, which is the majority of our International Services revenue, continues to grow. For example, in sub-Saharan Africa, based on market projections we see an increase in 2014 of 25% and growing activity with complex wells over 2013. This is a market where we have a majority of the market share.

Moving to U.S. Services, revenue for external sales decreased 6% sequentially and 4% year-over-year, to $108 million. Adjusted EBITDA margin was 44% of external sales.

Our U.S. Services business consists of both on- and offshore activities. Onshore, we are witnessing a decreasing rig count and a competitive pricing pressure. Because of this we are not increasing market share and instead focusing on maintaining margins.

Offshore activity in the Gulf of Mexico continues to increase, and a forecast for 2014 shows even more increase in deepwater activities. In this region we have secured contracts for work on new rigs coming online in Q4 as well as 2014, and have recently renegotiated contracts in a positive direction on existing rigs.

Lastly, Tubular Sales revenues for external sales in the third quarter was $40 million, a decrease of 29% sequentially but an increase of 5% year-over-year. Adjusted EBITDA margin was 13% of external sales.

By its nature this segment's results are lumpy. Quarterly results are affected by customer activities and orders, as well as the timing of delivery.

With that, let me turn it over to Mark to review our financial results for the quarter.

Thank you, John. Here is a brief overview of the quarter's results. Total revenue for the quarter was $207 million, which reflects an 8% decrease sequentially and a 1% increase year-over-year. We currently have $65 million in deferred revenue on our balance sheet for the Tubular Sales segment.

Approximately two-thirds are related to one customer. This customer has ordered and paid for the pipes and connectors related to projects in the Gulf of Mexico. We anticipate the customer will begin to take delivery of the product in either 2014 first quarter or second quarter, which will allow us to begin recognizing the revenue.

Net income from continuing operations was $59 million. Because of the new public company expenses, changes in our tax structure, and the reserve for bad debt expenses discussed earlier, we feel our year-over-year and sequential comparison are not comparable.

Our results for the quarter were impacted by several items. Due to the recent IPO there was an additional $2.5 million year-over-year in expense relating to stock-based compensation. Going forward, we anticipate approximately $5 million in stock-based compensation expense per quarter.

We had $2.4 million in nonrecurring IPO transaction-related costs and $8 million additional tax expense due to our US operations becoming taxable subsequent to the IPO. Please note our anticipated effective tax rate in Q4 of 2013 will be approximately 18% to 20%. This accounts for the tax impact associated with the possible conversion of the preferred shares outstanding.

Also, specific to the third quarter, results were impacted by an $8 million for bad debt expense related to outstanding unpaid invoices in Latin America. With that, adjusted EBITDA for the quarter was $101 million and includes a deduction for the $8 million reserve I just mentioned.

Adjusted EBITDA margin for the quarter was 37.5%. As a Company, we focus on EBITDA growth. Our EBITDA margin is impacted by our segment mix.

Third-quarter diluted earnings per share was $0.29 with weighted average shares outstanding of 190.4 million. Included in the per-share calculation is the assumed effect from preferred share conversion of about $4 million. Q4 weighted shares outstanding will be approximately 207 million shares.

Lastly, the Board of Directors declared a dividend of $0.075 per common share, subject to applicable dividend withholding taxes, for the record date of November 29, with payment on December 19, 2013.

I will now turn the call back over to Keith for some final comments before we open the call to question and answers.

Again, I think Frank's position is still strong. I think the Company is strong, our outlook is great.

One other little note. We have added two new Board members. Mr. Gary Luquette, who comes to us with 35 years as President of the Chevron Corporation; and Mr. Mike Kearney, who has 35 years in the industry also, on the finance side.

At this time, I would like to go ahead and thank everyone for their continuing support and turn it over to questions.

(Operator Instructions) Sean Meakim, Barclays.

Hey, good morning, guys. I just wanted to start off talking a little bit about what you are expecting in 2013 being flat to 2012. As we think about the sequential change from 3Q to 4Q, what is driving maybe the revenues a bit lower, kind of by segment how you are seeing things in 4Q?

What we are seeing is lower revenues coming in from our US land markets and also our Pipe and Product division, Tubular Sales.

Can you break down for us a little bit more -- I guess we were expecting those pipe orders in 3Q in 4Q. So you are expecting across those two and so all that shifting into the first half of next year?

It should. The pipe orders we think will get filled through next year, probably in the first half. But it is not clear.

So is there any -- so in terms of that change, would you classify any of it as being delays in offshore, whether it is Gulf of Mexico or international?

Yes, Sean, I can answer. This is John Walker. You're absolutely correct there. The delays, we are seeing some slippages I'm sure that the general industry is seeing.

We are seeing slippage in delivery of components onto the drilling rigs and ultimately the drilling rigs being deployed to their first operations. It was anticipated in Q4 that some of the rigs would come in, in Q4, and from the Gulf of Mexico as well as the Africa Sub-Saharan Africa basis. We are seeing slippage there, and just we have reassessed it. And we see that going to be in the first half of 2014 now.

Okay. So then as you guys think about -- you mentioned the pressure in the US. Can you give us a little more color on where you are seeing competitive pressure? Is it in some of the more active plays where there is a lot of equipment, say in Texas or North Dakota? Where you are seeing those competitive pressures and what that dynamic looks like.

Sure. Again, in Texas, for example in Corpus Christi on a year-over-year we are down about $6.5 million. So we are seeing a lot more competitive nature on land. We have actually got 31 competitors in Corpus Christi.

We are seeing overall on the land has been down approximately $18 million. So that is a reflection of just the competitive nature in the market.

We are also seeing in North Dakota a reduction out there over 2012, and in Oklahoma as well. So overall the land market has been a little bit disappointing for us.

But the optimism on a go-forward basis is the deepwater offshore side of the business, which we've been continuing to communicate with everyone. It just becomes a matter of timing.

The Tubular Sales side of the business again is related to -- the majority of our Tubular Sales is sold to the offshore side of the business.

Right, that makes sense. I guess one last thing for me. Have you -- are you willing to give us some initial thoughts on 2014 and where you think things could shake out from a revenue basis?

We really don't want to go there, Sean. Our operations are largely, as you know, driven by the rig count, particularly the deepwater offshore rig count. And obviously we are seeing a lot of that construction being delivered in 2014, and we are getting our share of it.

So we think we will be up and we think we will have positive operations.

On the onshore side it is really difficult. When it tightens up we perform quite well. But when it -- if it stays competitive like it is, we are not going to chase the market downward and use our rigs at lower margins. We're just -- we're not prepared to do that.

So we are optimistic about 2014. We think our overall operations are just where we want them to be. But at this point we are not comfortable in giving specific guidance.

All right. Fair enough. Thanks a lot.

Jim Wicklund, Credit Suisse.

Good morning, guys. If I could drill down just a little bit more on the US part, we have been given guidance that you guys generate about $50,000 for casing an onshore US well. If I look at the sequential drop in revenues, then that seems fairly significant. And we haven't seen the rig count or the well count onshore particularly dropping; and we've actually had a couple of rig additions in the Gulf of Mexico.

So can you give us an idea of how big of a price drop, price competition, what the magnitude is, so we can have a better handle on how to model this going forward?

John, why don't you handle the offshore side? And I will do the onshore.

Sure. Well, you know, as we talked about earlier there, the rig slippage has been an effect on us because when we planned and projected for it we really saw a lot of deliveries coming in, in Q4. And that affects the Services side of the business primarily; but then the follow-on of course is the pipe and Tubular Sales.

So when the slippage started occurring, the business is still there. It is under contract. It is just a matter of timing.

And we just feel more comfortable in putting that into 2014 at this point. If optimistically some of it moves into the last month of 2013, so be it; good for everyone.

But we just feel more comfortable at this point based on us just being a newly publicly traded company that that is moving into 2014.

Okay.

And specifically, Jim, some of the newbuilds that came out in the Gulf of Mexico, the ones we got have slipped in -- they're going to start up in 2014. So that is just the way it shakes out. Our competitors got some of the ones that start in 2013.

Onshore, in the areas in which we operate, the rig count is flat to down. So you've got -- you have had increased competition in some of those areas.

And again, the way we run our Company is not purely for market share. So in areas where it has been overly competitive and people are pricing at levels that we don't want to go to, we just -- we are not going to chase it down, because we think this market is going to strengthen. And when it strengthens, we don't want to have to sit there and then walk our prices back up.

So that is really what drives it. It has been -- it is not across-the-board onshore. It is specific markets. But we really don't want to go into those specific markets on the phone.

Jim, can I just -- I want to expand a little bit and give you a little bit of flavor on that from a global basis, or let's talk a little bit about International. And this is generally speaking.

Africa regions, our Far East regions, and Canada has been just as expected. There is a lot of optimism there.

We have seen slippage in Azerbaijan over the past two quarters. It's more affected right now. But we do see through the end of Q4 and going into 2014 a pickup there, and that is a long-term commitment and contract for ourselves.

Israel has been slower than expected due to the gas export legislation negotiation. It appears now that that has been resolved and the activity should increase in the second half of 2014.

Norway has historically been good for us, and it was good in the mid part of the year. But there is a tightness in the market in Norway, and I am sure everyone is aware of all these new high-capacity jackups that are coming in. And once they actually start getting deployed we are in a good position there, because we actually have five-year contracts in place in Norway for a lot of the IOCs there.

So, on the disappointments side, rig deployments in China and New Zealand have contributed to the reassessment of Q4. Brazil has slowed down due to the IOCs generally slowing down, and I am sure everyone is watching the news for the Brazilian independents -- a large independent there stopping operations.

So, we don't work in Brazil for the large integrated oil company at this time. But they have been approaching us recently.

So that is an overview from an offshore perspective internationally.

A bright note offshore, and this will address some of the comments I have seen, we have seen, from analysts on our margins. We are having the same margins that we have had offshore.

So we have not had pricing pressure in our offshore contracts. That is good news, and we are comfortable, and we are pleased with how the offshore market is going.

It is just, like John said, we have just had some places where things have slipped to 2014.

It is like a stall, you know?

Ian Macpherson, Simmons.

Thanks. Just wanted to continue along that thread of what has been pushed back internationally. Mike, it sounds like your general outlook structurally is not changed.

I wonder, as we look at Q4, going through the third quarter and the first three quarters year-on-year your International Service revenues have been growing by 4% to 5% on a year-on-year basis. Is that what you might expect in the fourth quarter?

And should we plausibly expect an acceleration of that next year, as some of these slippages correct themselves and work themselves out?

Thanks for your question, mate. (inaudible) The comments about us being flat would be reflective of how we see it in the near term. As far as 2014, there is a lot of optimism; and as long as the rigs get deployed based on the schedules that we are seeing at the moment, we should see obviously positive upward trends.

But as far as specifics, we are not comfortable in giving specific numbers because obviously it is fluid and can change. One thing is important, as John Sinders talked about earlier, our margins are healthy. We actually renegotiated contracts just recently in the Gulf of Mexico, where we had a positive outcome, with longer-term contracts being extended in a positive direction price-point-wise.

So we are definitely not under price pressure on a forward basis in the deepwater offshore side of the business.

And as far as the Q4, the Q4 would be flat. And I think there was -- alluded to numbers in the 255, 260 mark. That was one of the analyst's feedback on that. So our position is it would be flat.

Okay. Then separately, I might've missed this in the prepared remarks. The amount of revenue deferral with the Pipe and Products, the product that was paid, that you received payment that has not shipped and that can be recognized in the first half of next year, what was that dollar amount?

Our present balance for the deferred revenue is $65 million. Our beginning balance in the beginning of the year was $23 million. So the change for the year is $42 million.

Again, we expect that to be delivered sometime in 2014. Our current anticipation is most probably in the first half, first and second quarter.

Thanks. And Mark, do you still have pretty good visibility on the margin of that business staying in the mid-20%s on a structural basis?

Based upon what I am seeing now on the deferred revenue, I would say yes.

Okay, all right. Thank you.

Joe Gibney, Capital One.

Thanks, good morning. John, just wanted to clarify one comment on the $18 million sequential change in revenue on the onshore side. Were you specifically referring to US onshore sequential change, or was that year-over-year? Or you were referring to aggregate onshore operations inclusive of International? I just wanted to clarify that point.

It was for US operations and it was a year-over-year number.

Okay. Just stepping back, you seem to be referring to some sort of a stabilization. From a US onshore perspective, where are we, looking into the fourth quarter? The price degradation that you guys encountered here in 3Q, has it stabilized?

What is your broader sense of where we stand, US onshore, looking into the fourth quarter? Was 3Q the more material step-down? Just trying to get a sense of directionality on your US onshore view.

Mark, could you take that?

Sure, basically what has happened is that we have foregone increased revenues for the purpose of maintaining our margins in a number of the land locations. And that has traditionally been our strategy in the past.

We do have some bright spots in the land markets which we don't want to get into too many details on that. But as a general rule, it has been trending downward.

Okay, fair enough. And last one for me, just on International onshore. I know it is a less material piece of that business; you guys didn't really spend too much time talking about that.

Is that still directionally flat? Is it improving? I know most of the focus obviously deepwater when you are talking about International, but how about international onshore? Still holding in, trending up? Just curious on your perspective there.

It's flat for us as a Company. Of course, we see the trend internationally definitely growing. The focus as a Company is on the high-value that we offer the client on the deepwater side of the business. And that is obviously a certain portion of the business, and as we deploy and that starts to become fully fledged and operational, at that point we will look at some further penetration into other sectors.

From the Saudis to the challenges going on in Egypt, to the remainder parts of the Middle East, we are present and on all of those locations and have been there for several decades. But it is not our primary focus at this point.

Okay, fair enough. Mark, one last one, just to sneak it in. Is CapEx for the year still targeting $200 million (technical difficulty)

About $63 million coming in for the fourth quarter.

Okay, thank you.

Robin Shoemaker, Citi.

Thank you. I wanted to (technical difficulty) globally is growing at about 13% with about two-thirds offshore and one-third onshore. Is that still your view, broadly speaking, of the market?

Robin, yes, that would be correct. That is based on the Spears and Associates evaluation.

Okay. And in certain markets, sometimes we hear about oil companies shifting from more of a drilling mode to a completions mode. Obviously, that would impact demand for your services. We have heard about that, for example, in Brazil here recently and particularly with Petrobras; and I'm not sure if that is your customer there.

But how does that -- do you find that sometimes your business is impacted when there is a shift from drilling to completions from a major customer?

Robin, yes, good question. And absolutely right; there is an impact, but it's actually on the positive side. It is not on the negative side.

As we move from the exploration and the appraisal wells, and then from the casing and tubular installation standpoint, and move to the completion and workover intervention phase, that creates a whole new market for us. And we have a substantial amount of technology in that arena that we currently offer the market. But as the market moves more into the completion phase, that can only benefit ourselves.

As far as answering your question on Brazil, that has had no impact on us whatsoever, with Petrobras moving from a casing exploration phase into a development phase.

Okay. Then one final question, Mark. So we are subtracting $4 million from net income before calculating EPS. Now what is -- is that $4 million a preferred dividend, or what is that?

What occurs is that the actual financial statements are showing approximately 74% of the US taxes; because, of course the public company side owns 74%. Mosing Holdings owns 26%.

So that particular number is the assumption, and we do a fully diluted earnings per share calculation. You need to assume that number into our EPS, our net income.

And that number is $4 million?

That is approximately -- I think it was $4.8 million was the number for the third quarter. What happens is, once you go ahead and assume the entire exchange happening, which we think is pretty much -- pretty remote, then you have to go ahead and include that in your earnings per share calculations.

I mean, Robin, it's John Sinders. We can take you through some of that off-line if you would like, to make sure that you are using -- that you pro-forma it correctly and using the right number of shares, etc. I know there has been a lot of confusion around this, and we can clarify that.

Okay. Thanks. Appreciate that. Thank you.

The best way to handle your valuations would be by our EBITDA I think at this point, until the earnings per share comes back to normal.

Okay, thank you.

George Venturatos, Johnson Rice.

Good afternoon, guys. I wanted to touch on the U.S. Services business. Apologies if I missed this, but you mentioned US onshore was down year-over-year. Wanted to see if you could give us that change sequentially for US land in 3Q.

Then also, how do you think about the U.S. Service margins going forward as a result of what appears to be a positive revenue mix shift going on?

George, we normally do not disclose our revenue numbers for our onshore business. I can't say that what we have done -- and we mentioned earlier in the call -- was that we have focused on maintaining our margins in the onshore business rather than chasing revenue.

Okay. If you look at what you said, US onshore wise it sounds like there was specific plays where we are seeing pricing pressure. Just curious if you could maybe just tell us how concentrated that pressure is, in terms of the number of plays versus what you are currently operating in today.

Not really. I think you can say that as --

Where the gas is (technical difficulty) we have some competition in the [hot] areas, too.

Okay.

As the market heats up, particularly for oil, that is a positive for us.

Okay, appreciate it, guys.

Ian Macpherson, Simmons.

Hey, thanks. Mark, just a couple follow-ups. With your bad debt expense, I would presume that's OGX; is that correct?

And really I guess more the real question is, are you fully purged with your bad debt risk? Or is there anything left on the books we should contemplate for Q4, for going forward?

Well, in general we feel our reserves are fairly conservative. They should cover all of our -- any items that we may have happening in the future. We might take a further reserve in the future; but again, based upon our current policy and our review of the situation, we feel we are in pretty good shape. And we have been very prudent about that and very conservative as well.

Okay. You mentioned $5 million of stock compensation going forward. I wonder if I could just double-check my G&A assumptions with you going forward of about $48 million to $50 million for the fourth quarter, and as a reasonable run rate going forward.

We are estimating $54 million for the fourth quarter.

Okay. And that is indicative for a run rate?

I would say, yes.

Okay. Great. Thank you.

[Brian Finkelstein], [Key Group].

Thanks for taking my call. I just had a quick question. Just directionally, the offshore working rig count year-over-year is up about 10% to 15%, whether it is jackups or floaters. Just trying to understand why your revenue did not track in line with just, I guess, where the rig count growth happened.

We are not tied just to the rig count. We are tied more -- and you can look at us more to the deep and ultra-deep side of the rig count. So therefore that is why we are not going to track with the total offshore rig count.

Okay. Was there any other like mix shift or market share changes?

No. Actually, we are happy with -- we got the contracts we wanted. Obviously, we always like to get more business, but our market share stayed or in some places did better.

Brian, this is John Walker. Just to reiterate what John Sinders was saying there, the execution plan of where we focus our business, we executed on plan. We have no dilution or penetration.

So as far as you're talking about the jackups, you know there's -- we are very familiar that the high-capacity jackups are an attractive portion of the market. We have been focused on the newbuild deepwater rigs coming out within the marketplace for the appropriate locations. So there has been no dilution there.

Okay. Just a follow-up question from what was said earlier. I think, did you guys say West Africa you thought there would be a 25% increase in drilling activity? Is that --?

No, that was Sub-Saharan Africa.

Sub-Saharan? Okay, perfect. Okay, I appreciate your time.

Dick Kindig, Keeley Asset Management.

Yes, I would like to understand a little bit more on the competitive situation. Who are the competitors offshore? And how could you possibly have 31 competitors in Corpus Christi onshore? I mean, who are they? Drilling contractors?

Dick, for the first question offshore, we -- our major competitor offshore is Weatherford and we actually have a -- the other competitor would be Baker. From an onshore basis, there are 31 competitors in the Corpus Christi area.

And that is a combination of international service companies, but there is a lot of small players there with one, two sets of packages of equipment. And often they compete against us in certain portions of the market.

The barriers to entry in the land market are limited. It is changing from a regulation standpoint, and as the complexity of the wells get deeper and more into a lateral through the fracking, the requirements for fracking.

But it is a very competitive market. It is a market that we want to continue to be in for various strategic reasons. But we do actually have 31 competitors down there.

Are they primarily drilling contractors, or are they just casing?

It is a combination. Some of the drilling contractors will offer that service inclusive of their day rate. But the majority I would say are service providers.

Isn't it more difficult to set casing in a horizontal well than it is a vertical well? And wouldn't that be more beneficial to a company like yours, with all your experience?

Absolutely. Yes, absolutely. As I was saying there, the longer the lateral sections the more complex it is to get the bore isolated with the seal integrity and well integrity. So as the regulations continue to increase and the wells become more complex, that puts us in a stronger position.

Okay, thank you.

Thank you, ladies and gentlemen, for participating in the Frank's International third-quarter fiscal-year 2013 earnings conference call. This concludes today's conference call. You may now disconnect.