Expro Group Holdings NV (XPRO) 2017 Q2 法說會逐字稿

Welcome to the Q2 2017 Frank's International N.V. Earnings Conference Call. My name is John, and I'll be your operator for today's call. (Operator Instructions) Please note the conference is being recorded. And I will now turn the call over to Blake Holcomb.

Thanks, John. Good morning, everyone, and welcome to the Frank's International conference call to discuss the second quarter 2017 earnings. I'm Blake Holcomb, Director of Investor Relations and Communications. Joining me today on the call are Douglas Stephens, President and Chief Executive Officer; and Kyle McClure, Senior Vice President and Chief Financial Officer. We've posted a presentation on our website that we will refer to throughout this call. If you'd like to view this presentation, please go to the Investors Section of our website at franksinternational.com.

Before we begin commenting on our Q2 '17 results, there are a few legal items we'd like to cover beginning on Page 3. 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. Such 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 that could cause actual results to be materially different from those set forth in these forward-looking statements. A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC's website or on our website at franksinternational.com. There you may also access both the second quarter earnings press release, and a replay of this call. Frank's International uses its website as a channel for distribution of material company information. Such information is routinely posted and accessible in the Investor Relations section. Please note any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in the second quarter 2017 earnings release, which was issued by the company earlier today.

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

Thank you, Blake, and good morning to everyone on the call. So the second quarter for Frank's International was another step on our path back to an improved and sustainable business, based on the actions we have been implementing over the last few quarters. And I'm pleased with the progress we've made in executing on our strategy and we're beginning to see the results of increased activity from our efforts to gain market share. However, as you can see, we're clearly not yet [net] where we need to be. And from the macro perspective, the commodity prices appear to be range-bound in the $40 to $50 per barrel range. And although well economics for some offshore projects are improving, we do not yet see this translated into an overall market rebound. So in this environment, the base pricing for our services remains under pressure.

We continue to combat this pricing pressure by upselling our technology that saves our customers money by reducing rig time and improving the overall integrity of their wells. We are also taking a hard look at our cost structure to be sure we're keeping our expenses under control and eliminating indirect costs that impede the margins and cash flow. That being said, the outlook for our business is improving in the second half of 2017 and on into 2018. We're benefiting from the commencement of international work awarded over the past several quarters, the expansion of Blackhawk and the upturn in the U.S. onshore market. We're also making progress in improving our cash flow while employing a more disciplined approach to capital program. But we understand there is more work to do. We continue to find methods to improve our margins, to protect our strong balance sheet and improve our profitability.

Moving on to Page 5, I will comment on the highlights of the second quarter. These highlights correspond to the pillars of our strategy, which we have described previously, which are: Continuing to lead in our key markets, growing in markets where we have historically been underrepresented, and becoming a broader well construction company. In Q2, our total company revenue grew 6% sequentially from strong performance in our International and Blackhawk segments. The International improvements can be attributed to our efforts over the past 18 months to grow share in target markets where we've not had a large presence and where we have a competitive advantage in technology. Blackhawk continues to benefit from strong product sales in the growing U.S. onshore market and from the introduction of new technology offshore, including well intervention rentals. Included in this well intervention business is our line of storm packers for disconnecting a drillstring during weather emergencies in offshore wells. In fact, we were present with these tools on 5 rigs during the tropical storm we had in the Gulf of Mexico in June.

In the U.S. onshore market, our tubular running services grew 18% quarter-over-quarter. Our growth in this business has slightly trailed the rig count in the past few quarters, but we're now trending closer towards keeping up with market growth. And we've conceded some share during the upturn but are generating better margins and cash flow through increased pricing. We remain the leader -- the leading provider of tubular services in the U.S. onshore market and are maintaining adjusted EBITDA margins now above 20%. The pricing for services in the market is stabilizing at a higher level and we expect to be gaining share with targeted customers in the coming quarters.

Further evidence of our growth and cost control efforts are reflected in the return to positive cash flow from operations and adjusted EBITDA in the second quarter for the first time since Q1 2016. And at this point, I want to acknowledge both our operational and finance teams for working to reduce our days of sales outstanding to improve cash flow, even our -- even as our business has shifted to markets that have tended to have longer-dated receivables. We are encouraged by our ability to reduce our working capital requirements even while we grow our top line revenue. This will continue to be an area of focus for the remainder of the year as we drive to be free cash flow-breakeven for the full year 2017.

The final highlight I want to point out is the recent win of 6 incremental rigs from our competition in the U.S. Gulf of Mexico. We have historically been a leader in this market and maintaining a dominant position has been a key part of our strategy during this downturn. So I want to congratulate our sales, engineering and operational teams for their effort that led to winning this work and for their dedication to putting the needs and goals of our customers first. The Gulf of Mexico is likely to continue to remain relatively flat in terms of rig counts for the remainder of the year. But adding these rigs will position us for growth in this market in 2018.

I would now like to turn the call over to Kyle. But before I do, I'd just like to say a few words. So as you are aware from our announcement in June, Kyle McClure accepted the position to serve as our full-time CFO, and I want to commend the board for their decision and to congratulate Kyle for his appointment. He's been a valued member of our management team and I'm really pleased that we will have the opportunity to continue to work together for the employees, customers and shareholders of Frank's International. With that, I'll turn the call over to Kyle, to give some more detail on the second quarter results, prior to giving my final comments on the rest of the year. Kyle?

Thanks, Douglas, and good morning to everyone. Before I get started, just a quick note. Any financial or market share comparisons in my prepared commentary will be for second quarter 2017 versus first quarter 2017.

Turning to Slide 7. I will discuss some of what we saw during the quarter in the offshore market. Overall, market share was up slightly to 18% as we saw rig activity increase for the second consecutive quarter, primarily driven by jackup rigs. Europe saw the largest increase in share during the quarter as work commenced on 7 new rigs. Asia Pacific and the Middle East also saw gains in share and revenues. Revenues in Africa were up over 10% as an improved business mix was realized in the quarter. Latin America and Canada saw small declines in revenue and share and we successfully completed a couple of projects during the quarter. However, we expect to pick up some work in Brazil later this year, and continue to hold a 100% of the offshore rigs in Eastern Canada. The U.S. Gulf of Mexico weakened again in the second quarter, as we expected. This continues to be a challenging market in terms of pricing and activity which should begin to level out towards the end of the year and then we should see a pickup from the 6 rigs recently won.

Turning to the quarterly financials on Slide 8. Revenues for Q2 came in higher than we expected due to the acceleration of TRS growth internationally. Q2 2017 represents the first time in 10 quarters that core revenues have grown sequentially. Globally, our core TRS business was up 7%, providing further indication that we're having success winning in a mixed market. The International segment saw the most meaningful improvement as significant work scopes came online in the European market during the quarter. The Blackhawk segment also performed well, as the U.S. onshore business continued to strengthen and some additional offshore rental work was realized. The U.S. offshore and Tubular segments faced continued challenges from lower activity in the Gulf of Mexico.

Adjusted EBITDA was up roughly $2 million led by contributions from the International, U.S. onshore and Blackhawk segments. Incremental margins were 30% in the quarter. This is slightly below where we would like to be, but as the business mix shifts to lower-margin regions such as the Middle East and U.S. Land, and away from higher-margin regions such as the Gulf of Mexico, we would expect this to be the case. Second quarter cash flow from operations was $2 million, which was an $11 million improvement from Q1. This can primarily be attributed to working capital improvements, specifically trade accounts receivable. We're making progress to improve our DSO, particularly as more of our revenue is coming from some international markets that have longer terms.

Net CapEx for the quarter was around $3 million as we received about $500,000 in proceeds from the sale of assets. We expect to see CapEx likely to trend higher the remainder of the year as we allocate investment dollars to new equipment for work secured and complete the construction of our administration facility in Lafayette. We also plan to see increased proceeds from the sale of other assets, which will be additive to our free cash flow in 2017. We expect gross CapEx to be consistent with what we have previously mentioned, at roughly $40 million. We also ended the quarter with roughly $275 million in cash on the balance sheet, no debt, as well as access to our untapped $100 million credit facility.

In breaking down our segments, we will first look at International Services on Slide 9. International Services revenue in the second quarter increased 15% to nearly $54 million. Excluding slight declines in Latin America and Canada, revenues rose 25%. The increase can be attributed primarily to Europe activity increases. Europe has been a good growth story for Frank's as we have seen increased rig utilization and the ramp-up of TRS and drilling tools work in the quarter that should continue throughout the year.

We also experienced double-digit revenue increases in Asia Pacific, the Middle East and Africa. The changes quarter-to-quarter in the international regions have been a give-and-take but the overall direction of the market continues to be positive in terms of increased activity levels and some uptick in tendering. Adjusted EBITDA for International Services in the second quarter was $9 million, an incremental margin of just above 50% as we saw good flow-through of deepwater TRS margins.

Moving to U.S. Services on Slide 10. The second quarter revenue decreased 4% to around $30 million. The biggest driver of the decline was the U.S. offshore revenues falling 16% to a little over $16 million. Revenue was lower in the quarter due to a reduction in activity and some resetting of pricing on legacy work. The U.S. Land business again saw meaningful improvement with revenues tracking overall rig count of roughly 20%. Adjusted EBITDA for U.S. Services in the second quarter was a loss of $9 million. The decline in revenue and adjusted EBITDA can be attributed to lower activity and higher-margin offshore work in the Gulf of Mexico. As previously mentioned, our global support and corporate overhead costs sit in this segment, which was flat at $25 million in the quarter.

Slide 11 shows our Tubular segment performance. Revenue in the second quarter was $16 million, down 5%. Adjusted EBITDA for Tubular Sales in the second quarter was $0.8 million, down from $2.3 million as manufacturing expenses, which are housed in this segment, rose by about $1 million. The majority of our tubulars revenue is generated in the Gulf of Mexico, as we have previously stated remains soft. We are targeting some opportunities abroad that could improve results as they tend to be larger in size and scope, but more broadly, we would expect this segment to decline further in the second half of the year.

Wrapping up the segments with Blackhawk on Slide 12. Total revenue for Blackhawk was $18 million, up 12%. U.S. onshore revenues continue decline from record product sales in the Permian Basin despite a slight delay in the launch of our new frac plug, which is expected later this year. We also saw improvement in the offshore well intervention rentals business. Additionally, we achieved our first major international synergy with the TRS business in offshore Mexico. Adjusted EBITDA increased by nearly $2 million as business mix shift to some higher rental margins and lower costs were achieved.

Through the first 8 months since the Blackhawk acquisition we're making great progress. We are exceeding the targets from both our acquisition revenue and adjusted EBITDA for 2017 and believe we're on track to improve synergies internationally next year as the necessary certifications are obtained and international expansion accelerates. To close out, I would like to offer some comments on the second half outlook for 2017. Total company revenues are expected to increase 5% to 10% second half versus first half 2017. This growth will be driven by increases in our Blackhawk, International and U.S. onshore businesses. We base this growth on our current visibility of upcoming projects and view that we will not see a material deterioration in the U.S. onshore market the remainder of the year. The additional rigs awarded in the Gulf of Mexico could offer upside above the higher end of this range depending on rig schedules. But for now, we expect the U.S. offshore and tubular businesses to be lower in the second half of 2017.

Looking at adjusted EBITDA, we would likely see incremental margins in the 25% to 30% range. Growth in the lower margin onshore TRS businesses combined with increased Blackhawk product sales will offset some of the growth in the higher margin international offshore businesses. I will now turn the call back over to Douglas for some final comments before we open the call to Q&A.

Thank you, Kyle. And let me conclude our prepared comments on Page 13 by emphasizing the key takeaways from the quarter and for the remainder of the year. So despite the offshore market remaining mostly flat to down, we expect to grow our top line revenues 5% to 10% in the second half versus the first half of 2017. In a company where over 75% of our revenues come from offshore services and product sales, we see this as a very positive trend. It reflects our success in gaining share in international land and shelf as well as targeted new geographies where we had previously been underrepresented. We're also expecting to see significant growth from our Blackhawk and our U.S. onshore business as we catch up to the rig activity over the past 12 months and drive pricing.

The introduction and commercialization of new technology will also be a key factor to improving our incremental margin on top line growth. Some of these technologies broaden our traditional service offering and provide the opportunity to increase our revenue per rig while improving customer efficiency, safety and well integrity. The other component to delivering better margins will be how we manage our costs, through disciplined spending and the removal of indirect or unnecessary expenses. Some cost inflation comes with growth, but we're confident we can find ways to improve accountability within our organization and bring more to the bottom line.

Taking these steps, in combination with selling some nonessential assets through the remainder of the year, will allow us to achieve our breakeven cash flow target for 2017. And as you know, we're fortunate to have a strong balance sheet that offers the flexibility to allow us to grow through a variety of paths and we plan to maintain that optionality. Enhancing our product and service portfolio with acquisitions such as Blackhawk give us the ability to grow revenue and profitability in a market that we don't expect to see meaningful improvements in the near to medium term.

The recent successes we have seen winning new business has served as a confirmation that our customers continue to value our services to meet their well construction needs. And I'm proud of our operational support teams that have maintained focus in doing their jobs safely and putting the customer first.

As the industry continues to find ways to make exploration and development projects more productive and economic, Frank's reputation for quality and reliable services will position us to take advantage of new opportunities. But until a full market recovery occurs, we will continue to find ways to grow our business through introduction of new technology and further expansion of our broader service offering across our global footprint. Continued success in accomplishing these goals will allow us to produce attractive returns on capital and generate cash flow to create shareholder value over the longer term. We will now open up the line for your questions.

(Operator Instructions) And our first question is from Sean Meakim from JP Morgan.

So I was hoping maybe we could start with a little more detail on the contract win. Can you give us maybe just a little more on the scope? Timing sounds like maybe more of a 2018 event? Just trying to get a sense for the impact here and just thinking about -- given the challenges in that market, I imagine some costs -- some different moving pieces here with respect to the margins, and it's higher margin work, at the same time it's a pretty challenging pricing environment, just trying to get a sense of the impact on the U.S. business.

Yes. Sean, so thanks for the question. So I think your analysis is correct, is that -- look, this is a customer that we have been working for, for some time. We've worked for them previously and we work for them around the world, but not here in the Gulf of Mexico for over a year. So we're very happy with this. And I think our sales team has done a very good job. You are correct. There is pricing pressure in the Gulf of Mexico compared to where we were historically. But I can assure you -- or we can assure you that the variable margin for this work at the well site is still very good. And with 6 rigs coming online, this gives us quite a bit of volume to absorb, particularly our costs for our operational base in the Gulf of Mexico.

And we expect this to start this up in Q4. It's not going to be immediate. I think the customers in the Gulf of Mexico are fairly sophisticated and they are very concerned about lost time. So they manage -- their management of change is quite sophisticated. So we don't have all of the rig charts yet of when we're going to be starting up. We're anticipating starting with the first rig in Q4, October-ish, and then ramping up the remainder of the rigs through the remainder of this year and into 2018, which is why we haven't indicated a lot in terms of revenue in this year, it'll primarily be in 2018.

And could you maybe give us a little more with respect to -- Kyle talked about the growth capital for this year. And is there any growth capital associated with these projects? It didn't sound like there was any incremental from what you had guided previously. And also maybe just any mobilization costs or other things that are run through the P&L in the second half?

Yes, so for the CapEx piece Sean, it's Kyle, for the most part we have all this equipment at the ready as we think about, sort of the 2018, sort of maintenance and growth CapEx. We're not quite there from a budgeting process standpoint. But for these particular rigs, we've got the assets in play at this point.

Our next question is from Chase Mulvehill from Wolfe Research.

Let's see, so I guess, I just want to come back to the guidance a little bit. The incremental guidance was, second half versus first half of 25% to 30%. A little bit lower than I probably would have thought, especially -- maybe it's probably targeted at the Gulf of Mexico. So maybe if you can kind of walk us through on the margin side, the pluses and minuses in the back half of the year? I'm assuming that International is probably better, offset by Gulf of Mexico. So maybe if you can just kind of help us back into those numbers a little bit, on the 25% to 30% incrementals.

Yes, so if you take a look at Gulf of Mexico, which did $17 million -- or sorry, $16 million in the quarter. We have that coming down by another kind of 15% into Q3 and then kind of holding flat into Q4. So the decremental margins in the Gulf of Mexico are coming in at 100%. So it's sort of a tough headwind. It's sort of dollar for dollar coming out. And we haven't really layered in the 6 rigs in our back half forecast, just because as we said, we don't have the sort of the schedules to kind of feel comfortable about putting that out there in the public domain at this point in time. So the puts and takes our International, you're going to get nice incremental margins here, sort of across the board. But as we look at the U.S. Services segment, obviously we've got our sort of global sort of organizational support and corporate overhead sitting there. And then you've got the headwinds as the Gulf of Mexico deleveraging happening in that space there. The U.S. Land will be a good story in the back half of the year, as we continue to see that tick up nicely. But when you're dealing with sort of 50% variable margins at the well site, those guys coming offline had a pretty big impact [and a] -- the incremental headwinds at this point in time.

Okay. And on the International margin side, do you think that the back half of the year we could average 20% adjusted EBITDA margins?

Yes, I think that's a fair assumption for the back half of the year.

Okay. All right. Last one and I will turn it back over. How much of our -- how much of your International revenues are onshore versus offshore now?

I would say they are predominantly offshore. We've got some onshore in the Middle East, but by and large, it's offshore.

Next question is from Ian MacPherson from Simmons.

Douglas, can you say what the average term duration is of the new -- the 6 new contracts in the Gulf of Mexico?

Yes, these are long-term multiyear contracts that we've signed this for. I won't give you all the details. But this is not a well-by-well type of contract, right? This is a longer-term contract. And we anticipate having a very long-term relationship with this customer. It's one of our best customers globally. So we anticipate this being long term.

When you sign multiyear contracts in this phase of the cycle, is the pricing fixed throughout the term or does it have variable mechanisms?

There are typically variable mechanisms in the latter half of the contracts.

Okay. And then also following up on the -- on Chase's question on the International side. Looking at the second half or even into '18, how do you measure your progress with regard to underpenetrated markets? I think specifically the international jackup market? Are you hitting your targets and do you still see significant runway ahead in terms of more market share penetration that you haven't gotten to yet?

Yes. So there's a couple of things. So, of course, we're not chasing everything. We're going after specific markets, we've used the term targeted markets. And there are some countries in the GCC which are very attractive for us, where -- to some extent the easy oil is timed and they're really [target] or have a lot more complex wells. And then certain countries in Asia as well where we haven't had as strong as presence as we would have liked. And again, there's only a few countries there where there is multi-rig, multiyear contracts available. I think we've done very well on gaining share and winning contracts. That side has gone quite well. Where I think we need more progress is actually being able to ramp-up and sell the technology and start generating real margin. So the contracts have been awarded. But we haven't been as quick in terms of generating the revenue and generating the margins as we would like.

Our next question is from Brad Handler from Jefferies.

I guess a few different questions from me. I suppose -- if we can start with the Gulf of Mexico in a couple of different ways. But on the revenue side, perhaps -- congratulations on the win, by the way. Are there some contracts rolling off? Is there a net number that we should think about, if we try to think about your market share? Have you lost some bids? Or is that -- did you have to give up some work relative to positioning yourself to get this -- to be ready to serve on the 6 rigs that are coming?

So Brad, there is still some contracts that are outstanding and, of course, there is always rigs coming off and on. But no, we certainly didn't have to give up anything to get this work, we have the infrastructure, the ability to do it, and there was no quid pro quo type of thing, if you give up this, we will give you that. So we certainly see this as a net gain right now. There are contracts obviously rolling on and rolling off. There may be some wins and loses elsewhere, but certainly smaller in scope. That's what we're anticipating right now. Compared to this, let's face it, there is not too many customers out there that are actually have 6 rigs working for a multiyear program, so -- it's not too many opportunities to pick up this type of work. So I guess the net result is, we see a significant increase in our share in 2018.

Makes sense. Actually would you mind, can you share your perception of your deepwater market share in 2018, once those -- once all the rigs have started in the Gulf of Mexico?

No. I'd be a little bit reluctant to actually give you that number here, to tell you the truth.

Okay, all right. A follow-up or an unrelated follow-up I guess. You made some references to profitability in the U.S. being impacted by property taxes and professional fees. Can you just give us a little bit more color around that, what the magnitude of those were? And I don't know that those sound like they have to be onetime events, so maybe a little sense of, is that something we can think about will continue to pop up, or happens at a certain time of the year, or again some more context around those, please?

Yes. This is Kyle. That's a good question. If you look at our U.S. Services segments are kind of where we pile all of our organizational, global support and kind of our corporate overhead sit in this bucket. So we have, sort of, a lot of cats and dogs sort of piled into this segment here. So as we have a one-off expense flow through in the company, it really impacts this segment from quarter-to-quarter. I wouldn't anticipate sort of the property taxes or professional services, either. I sort of a joke around here little bit which is sort of the law of small numbers that we're in right now, that if you have a $1 million unanticipated, unaccrued-for expense come through in the quarter, it really kind of throws that segment out of kilter. And so that's what we're sort of calling out there, is that we have one-off property tax that we didn't anticipate coming into the quarter or a professional services fee that we didn't anticipate as well. It's all sort of housed in this bucket, so we wanted to sort of make sure people are aware that this segment has some sort of underlying cost volatility to it.

Understood. But to be clear, I guess the guidance you are giving with respect to, say, decremental margins or what have you, there's -- you're not stripping out anything to arrive at a clean number as a base? It's including these charges, right?

We're not stripping out, it's included.

Got it. I guess just one last one for me please. I know these things can be very, very difficult to try to anticipate. But you have had recurring expenses related to the investigation that you've obviously had to call out. Any feel for how long that, from a charges standpoint I can understand resolution can be very difficult, but at some point maybe the investigation, the spending part is done. Any feel for when that kind of wraps up?

At this time, I think we are still obviously -- we made the announcement last year and anticipate we still have some tail on this from just the underlying investigation cost. Obviously we call it out in the reconciliation to adjusted EBITDA, but no real time horizon kind of -- on the tail for that spend.

(Operator Instructions) And our next question is from Joe Gibney from Capital One.

Douglas, just a question on Blackhawk as we think about this into the back half of the year, in particular, on the equipment certification process. I know it's sort of dovetailing into other markets and getting a little bit more synergies are predicated on a little bit of that lag. But could you kind of update us there, sort of time frame of maybe when you might see a little bit more traction in other markets, like say North Sea, that you've been targeting. Is it -- is it sort of, first half of '18 we start to get a little bit more traction there? Just help us a little bit there in terms of timing.

Yes. A very good question. No, you're correct. In actual fact, when the acquisition was done, it was anticipated that some of these rental tools would take a bit of time for certification in other markets and that's -- it's panning out as planned. So outside of the U.S., we are actually seeing pretty good results, very good results in Mexico thus far in some of the activity that's going on offshore there. The next places will be further east across the Atlantic and it will be in Q4 and into Q1 when we really start seeing revenue upticks there and through 2018 when we start seeing meaningful growth in the equipment rentals for Blackhawk as you've said, as we get the various certification requirements completed.

Okay. That's helpful. And Kyle, just a question for you. Again, circling back to the issue on global support and corporate overhead, just trying to understand. So I think last quarter was like a $20 million sort of guidance and that was up, obviously with some moving parts and some shifting of some G&A as you guys alluded to. But also included, I believe, some onetimes on medical that boosted that number more to like $20 million. So is going forward sort of a $20 million to $25 million range what you are kind of indicating? Or is this -- we've got the good guys and bad guys in the quarter that kind of impacted that to get to the $25 million number. So I was just trying to understand. You said flat $25 million. But I thought it was lower last quarter in 1Q?

Yes. So I think if you're going to sort of think about the rest of the year, I think we would probably think of that $25 million number as more likely to kind of be your run rate here in the near term. We obviously look at, sort of, opportunities around that cost structure here internally and what opportunities we might have there. But likely for the back of the year we should probably be thinking sort of closer to that $25 million number for Q3 and Q4.

And I'm showing no further questions in the queue.

Okay. So I just wanted to take this opportunity to thank everyone who is involved in the call, taking your time -- taking their time and thank you for your participation, your interest in Frank's International.

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating and you may now disconnect.