FI (2020 - Q4)

Good morning, and welcome to the Q4 2020 Frank's International N.V. Earnings Conference Call. My name is Nara, and I'll be the operator for today's call . I will now turn over to Ms. Melissa Cougle. Melissa, you may begin. Melissa

Good morning, and welcome to Frank's International conference call to discuss our fourth quarter and full year 2020 earnings. Our speakers today, as shown on Slide 2 of the earnings presentation, are Mike Kearney, Chairman, President and Chief Executive Officer and myself, Melissa Cougle, Senior Vice President and Chief Financial Officer. Joining us for the Q&A portion of today's call will be Steve Russell, Senior Vice President of Operations.

Thank you, Melissa. We appreciate everyone joining us for the call today. Turning to Slide 4. We delivered solid fourth quarter results with total revenue increasing 14% sequentially to just over $96 million. From an adjusted EBITDA standpoint, we were able to move the company back into positive territory, and what we believe to be the bottom with adjusted EBITDA increasing to $4.6 million. From an operational perspective, we experienced improved customer activity levels, primarily in our Tubular Running Services segment. We witnessed multiple rigs going back to work in several core operating areas, after previously being sidelined due to the COVID-19 pandemic. Additionally, we experienced an improving revenue backdrop in our US onshore business, which mirrored the average US land rig count increasing over 20% in the fourth quarter.

Thank you, Mike. Referring to Slide 7, despite a 14% growth in the fourth quarter, the company did see an overall revenue decline of 33% year-over-year, driven by the tremendous reduction in rig activity. This was brought about by the pandemic and affected both domestic and international rig counts. Mike mentioned the drivers of our strong fourth quarter performance, and we are optimistic these results indicate we are seeing a recovery pattern emerge, positioning us for further growth in 2021. Simply stated, we believe the worst is behind us. Full year adjusted EBITDA was $9 million and fourth quarter adjusted EBITDA totaled $4.6 million, representing a substantial improvement compared to the prior quarter. This also generated an incremental EBITDA margin of approximately 47%. Improved customer activity levels, especially in our Tubular Running Services segment and continued realization of our cost reduction measures, enabled our organization to move adjusted EBITDA back in the positive territory compared to the prior two quarters. The company made clear our ambitious goal of achieving positive cash flows for the year, and we are proud to close out 2020 meeting that goal. We produced $39.7 million of operating cash flow, which enabled $11.2 million of free cash flow generation. We were able to enhance free cash flow generation in the fourth quarter, particularly due to improved customer activity levels, strong working capital management and a continued focus on limiting capital spend. As of year end, the company had cash and cash equivalents of $210 million and no outstanding debt on its credit facility. Turning to Slide 8. Our TRS revenue totaled $65 million, generating $3.8 million in adjusted EBITDA during the fourth quarter. Our TRS segment benefited from the redeployment of previously sidelined rigs and improving backdrop in our US land business. Our greatest area of regional improvement was in Africa, which bottomed in the third quarter and experienced a strong rebound in the fourth quarter with multiple rigs returning to work. Our North American offshore region benefited from strengthening in the Caribbean and increased activity levels in offshore Mexico. In the Tubulars segment, as presented on Slide 9, third quarter revenue totaled $15.9 million, a decrease of 4% sequentially and 25% year-over-year. The slight sequential decrease in revenue was primarily due to strong tubular product sales in the prior quarter, which was partially offset by stronger tubular product and drill tool sales internationally during the fourth quarter. Segment adjusted EBITDA totaled $3.9 million or 25% of revenue in the fourth quarter. This compared to $1.8 million or 11% of revenue in the prior quarter. The enhanced profitability in our Tubular segment primarily reflects increased sales internationally and realization of fabrication and manufacturing efficiencies that have been initiated alongside our profitability improvement plan. Concluding with segments on Slide 10. Cementing Equipment segment revenue for the fourth quarter totaled $15.5 million, which was a slight increase sequentially and largely due to US land business recovery. The 38% year-over-year decline was driven by reduced customer activity levels in both US land and US offshore markets. International growth in this segment increased 35% year-over-year and has played a meaningful role in enhancing segment profitability, which was also improved on the back of many operational cost reductions stemming from our business reorganization conducted in 2020. Segment adjusted EBITDA totaled $4 million or 26% of revenue in the fourth quarter compared to $3.4 million or 23% of revenue in the prior quarter, resulting in an incremental EBITDA margin of approximately 120%. Turning to Slide 11. We have spoken throughout the year about our focus on redefining our cost structure, and feel 2020 was a pivotal year for Frank's in this regard. We achieved an overall 27% reduction in costs or $143 million year-over-year. $88 million of those reductions could be characterized as relating to our direct operational cost base. Although some of our cost reduction initiatives focused in this area, our core efforts have been to permanently reduce our more fixed indirect support costs, including both cost of revenues and SG&A. The entire company was engaged in this effort since November of 2019, and we achieved over $55 million of savings year-over-year in this cost category, the vast majority of which is permanent. We have completed virtually all of our specific cost reduction initiatives and we'll see the full year benefit of those reductions in 2021, along with additional efficiencies we believe will be gained during the year from our ERP implementation, which is going live presently. And looking forward and referenced on Slide 12, we believe that activity levels troughed during the third quarter and we do not see signs of further weakening, barring any unexpected pandemic effects. We expect the activity level improvement seen in the fourth quarter to hold in the first quarter of 2021 and begin to build strongly once more in the second quarter. We have clear visibility that certain major projects will commence, giving us some confidence that the planned improvements beginning in the second quarter will materialize and provide a backdrop for full year revenue growth in the high single digits. Enabled by our PIP effort, we believe that the company has a path to achieve double digit adjusted EBITDA margins in 2021 with this revenue growth, benefited by the full year effect of our cost savings programs. We also intend to maintain our strong balance sheet and have, once again, set aggressive working capital improvement goals to stretch ourselves and provide for positive free cash flow for the year. We will also hold our discipline around capital deployment and expect that 2021 CapEx should be approximately $25 million. With that, I will turn the call back over to Mike for a few closing comments before we open up the lines for Q&A.

Thank you, Melissa. Before we close out today's call, I would like to reiterate a few key points. First, Frank's has a solid operational platform that positions our organization well for 2021 and beyond. Our Tubular Running Services segment experienced substantial improvement in the fourth quarter, and we expect additional growth in 2021. In addition, further international expansion in our Tubulars and Cementing Equipment segments will be drivers of enhanced revenue and profitability as well. Second, the achievement of our cost reduction targets transform the operational cost structure of our organization. The vast majority of those cost reductions are complete and we will see the full benefits of all these efforts in 2021. Third, despite a very challenging year created by COVID-19 pandemic, we executed our business strategy with one of the best safety records in the company's history. Finally, despite the difficult year, our operational execution, capital discipline and cost reduction efforts enabled us to further strengthen our balance sheet. We have one of the strongest balance sheets in the entire oilfield service universe, and that places us in an enviable position to be able to act when potential opportunities arise. In closing, I would like to thank all of our employees for their hard work and dedication in 2020. The difficulties we faced provided an opportunity for our employees to rise to the occasion yet again, and deliver not only excellent service quality for our customers but also one of the best safety records in the company's history. With that, operator, we are now ready to open the line for Q&A.

Our first question comes from Ian McPherson from Simmons.

Congrats on the really good results and outlook here. I know cost cuts aren't necessarily enjoyable, but this is obviously a great outcome with the path forward. And so I wanted to dig in a little bit. We saw in the incrementals that play out for this year, the 47% sequential consolidated incrementals for Q4 were impressive. And I know the Tubulars business, in particular, is historically lumpy and moves around a lot from quarter-to-quarter. But when we look at the other two, TRS and Cementing, especially Cementing has really moved up into the mid 20s EBITDA margins. I assume that your outlook assumes that or better through '21? And then also maybe just a little more color on what you're thinking about the trajectory for TRS EBITDA margins as we move past Q1 and into the growth quarters beyond Q1?

Why don't we take those in reverse order. So I'll let Steve comment on TRS first.

Yes, I think operationally, our TRS business shows incremental margins of anywhere sort of 40% to 60%, that's what falls through. So you can sort of back calculate the maths based on that. The Tubular business, it's a little bit lower depending on the mix of that business. As you know, there's a sales business and a service business embedded in there that have different incremental margins but a little bit lower than on the TRS business.

Yes, I'll add to that on the Cementing side as well, Ian. So we actually have a little bit of product business on the Cementing side as well. And some of the cementing growth this year, particularly in Q1, will be coming from US land, which is a little bit of lower margin as well. So I think we will end up for the year probably looking in that range that you're seeing in Q4, maybe a slight degradation but somewhere in that range. I think the difference is what do we see here in Q1 as we're continuing to find that trajectory.

And could you also remind me, if you want to, again, kind of generalize a little bit. Within TRS and Cementing, what the general mix is now between offshore and land and the current run rate?

In the TRS business, it runs typically 70% to 80% offshore, obviously, 20% to 30% land. I don't have the latest Cementing numbers and that's obviously being driven by the recovery in US land that we have been seeing…

I'm doing some quick math here. It looks like it's probably at least give take 20%, I think you said 20% to -- I was busy doing my math. 20% to 30% land and 70% to 80% offshore.

One point you made earlier, Ian, that I would like to emphasize is on the Tubular side with those two businesses being so different, the drilling tools and the actual Tubular business, we're projecting we'll continue to see volatility in that as we move into this year. Overall, we feel pretty good about it but there will be lumpiness there. So I'm glad you pointed that out.

Well, Mike, now with improved visibility for this year, your balance sheet, still pretty good or comfortable free cash flow for this year. Where are we now with thinking more confidently about deploying capital, either back into the business or resuming a dividend program?

I think dividends are still a little ways off. Of course, it would be nice in the future to reinstitute a small dividend, but we're not even actually thinking about that right now. In terms of the CapEx, we're going to try to keep our CapEx pretty much in line this year with last year. It's really a challenge. We've got so many good new technologies and they do require capital. This isn't just a steady state business. We're always trying to invent with a purpose. The things we've come up with over the last year, the customers love, but it takes capital to build them. So it's that high wire act of trying to roll out new technologies, generally having higher margins and not spend a lot of money at the same time. So it doesn't fit needly in the same bag but we're going to do our best to reinvest in the business wisely is all I can say.

Our next question comes from Taylor Zurcher.

And let me echo Ian on congrats for a great quarter. My first question is with respect to the 2021 guidance. You're basically framing things as high single digits revenue growth year-over-year. I was wondering if you could help us think about the revenue growth you're expecting that's embedded in that forecast on a segment level, which ones might grow faster than that high single- digit rate, which one might be lower than that? And then specific to TRS, I'm just curious, as we think about the ramp Q2 and beyond, if you could point to any specific regions that are driving the bulk of that growth?

So I think if we start with just the growth, you could expect that TRS is probably going to be the most stable, if you will. We've got the international expansion. Again, smaller, are we going on numbers or percentages but I think you could expect the high single digits sort of across the board, a little bit more coming in on the smaller segments as we are continuing the international footprint expansion, and probably right in the zone there on the TRS side. I think your other question around -- Taylor, remind me?

Just the regional drivers within TRS regional drivers type of range…

The regional drivers. Yes, it's largely -- I'll let Steve, but it's largely Africa is probably our single strongest region for the year.

Yes, I mean, I think is everybody was aware, Africa all but shut down here during Q2, Q3 2020 with COVID hitting. We've seen a wake up in Africa in Q4 and we sort of continue to expect that as we go through Q1 and then particularly in Q2, Africa waking back up again. We've also got some projects starting up in Australia and Brazil, where we have line of sight to some fairly substantial projects starting up in Q2 onwards.

And specific to TRS again, it feels like a lot of the growth in Q4 and probably a lot of the activity in Q1 is attributed to some COVID and due slow down activity that's starting to come back. And so I'm curious for the full year 2021, are you starting to see operators progress forward with deepwater projects that maybe didn't exist prior to COVID or there are real true incremental activity, or is it still kind of just resumption of activity that has down due to COVID?

Yes, I think there's a little bit of both in there, yes. The rebound we've seen to date was really sort of COVID projects coming back on stream again. But we have seen and are talking to clients now about projects restarting. Again, I'll call out the Eastern Mediterranean here where it was totally dead last year, but now clients are looking and starting to plan projects in that part of the world where those would typically kick in. We're expecting somewhere around Q2, Q3.

Our next question comes from Jason Bandel from Evercore.

My first question, I guess, I'll start on the US land side of the business. I know you guys spend a lot of time and effort pulling out costs and rightsizing locations in 2020. And the market, obviously, started to recover off at the very low base. How do you guys balance trying to be opportunistic with the ability to keep your cost structure low and in place?

When we went into the downturn in US land, we really wanted to keep ourselves where we had sort of an operational footprint where we could service the basins, but then sort of pull the cost down. And we did that with a number of mechanisms, primarily focusing on sort of multiskilling people and having folks that generally work in a base going out and doing jobs that gives us the sort of footprint and the base in each of those basins to rebound back up again. And I mean, obviously, as everybody has been watching the rig count, we've seen it bounce back again. That started in the Permian and the Eagle Ford, but we've now start seeing recovery in most of the other basins. So we're sitting, we think, quite well to pick up that activity in all basins as it picks back up again here.

And then on the technology side, I know, Mike, you spent some time on the call highlighting some of the commercialized technologies that you guys deployed into the field. Can you talk about your approach to monetizing your technology development and what customer adoption rates look like, especially for some of the remote operated technology that you guys are deploying?

Yes, I'll start it off and I'll let Steve pick up. The customers really appreciate the remote nature of a lot of our technologies, not all but most of what we are working on now focuses on safety, getting people out of the red zone. Even on land, this Remote CAM viewer basically takes two positions down to one. So that's a good example of the way we can cut cost and try to remain competitive, and provide the customer with some additional advantages. But it's very exciting, these new technologies. Of course, the industry is slow to adopt so we usually go out with several field trials, and there's more and more uptake. So I wish we could flip a switch and have all customers adopst at the same rate, but that's not reality. But we're really seeing very, very good uptake from our customers. So it's back to that balancing act of, I think we're probably going to be more constrained in a way on the capital we want to devote compared to customer uptake. But as I said, that's the tight rope we need to walk. And of course, it takes time to build these devices. There's lead time as well. So once again, we do sales and operational planning. We're in close contact with the customers. So I think we've done a pretty good job of calibrating kind of the rollout of the technology and spending the capital with the customer uptake. So Steve, I don't know if you want to add anything to that?

I think Mike's prepared comments there, there was commentary on some sort of decrewing type technologies that we're putting in there. And I think COVID has accelerated the demand for that. But I think that will stick in a post-COVID world, a demand for having less people to be able to provide operations on a rig site. So like Mike mentioned, we're pushing those out quite aggressively and we're fairly hopeful that on customer uptake on those.

And maybe a final comment to chime in here and say, it is on our objective list this year to -- there's several companies that are technologically sort of -- that specialize in monetization, and they have what's called a Vitality Index. We have a Vitality Index as well. Although, admittedly, we're looking to sharpen that metric, which will help to guide us off on customer, like formal customer adoption rates in the future. So it's part of our wave of the future to really get sharper on the ability to speak to those metrics.

I'll try to squeeze one more in here, I guess, coming out of the downturn and so far in the early stages of the recovery. Can you talk about if the competitive landscape has changed or evolved at all? And obviously, you have a structurally smaller US land market and you touched on your prepared remarks about customer responses being varied internationally. How are you kind of seeing this customer competitive landscape evolve here?

Again, I think it's quite different in the different markets that we operate here. You mentioned US land specifically. I mean, there has been some competitor consolidation on US land, but it still remains a highly competitive marketplace there. I feel we have seen bottoming pricing in US land and we're sort of testing some price increases as we speak in US land to see if they stick. In the international marketplace, again, there are some regional competitors in there in certain markets. But on a sort of a global basis, our main competitor is still out there. And I wouldn't say there has been any material change from what we've seen in the past on how we compete with them.

And I'm not showing any further questions at this time. I would like to turn the call over to Mr. Michael Kearney for closing remarks.

Okay. Thank you, operator. I'd like to close by reinforcing our unwavering commitment to safety and remaining the high value, low risk provider of services and products to our customers. We look forward to updating you on our progress and performance in our first quarter call, which will be in May. Thanks to everyone to be on the call and your interest in Frank's. Goodbye.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.