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Frank's International N.V. (NYSE:FI)
Q1 2019 Earnings Call
May. 7, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the First Quarter 2019 Frank's International N.V. Earnings Conference Call. My name is Dani and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instruction) Please note that this conference is being recorded.

I will now turn the call over to Erin Fazio. You may begin.

Erin Fazio -- Investor Relations

Good morning, and welcome to the Frank's International Conference Call to discuss first quarter 2019 earnings. I'm Erin Fazio, Manager of Financial Planning and Analysis and Investor Relations.

As speakers on today's call, we have Mike Kearney, Chairman, President and Chief Executive Officer; and Kyle McClure, Senior Vice President and Chief Financial Officer. Joining Mike and Kyle for the Q&A portion of today's call will be Steve Russell, President of Tubular Running Services; Nigel Lakey, President, Tubular; and Scott McCurdy, President of Cementing Equipment.

A presentation has been posted 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 first quarter 2019 results, there are a few legal items that we would like to cover beginning on slide two. 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 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 any 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 first quarter 2019 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 that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in the first quarter 2019 earnings release, which was issued by the company earlier today.

On today's call as shown on slide three, Mike will take you through a review of this quarter and highlights of our reporting segment change. Kyle will then review the financial performance of the quarter and we will close with a question-and-answer session.

I will now turn the call over to Mike.

Michael C. Kearney -- Chairman, President, and Chief Executive Officer

Thank you, Erin. We appreciate everyone joining us on the call today.

In the first quarter, we generated $144 million of revenue, which was up 25% from the first quarter of 2018 and essentially flat with the fourth quarter. Adjusted EBITDA was $9.7 million in Q1 and incremental year-over-year margins were 42%.

Our customers are increasing their spending levels in several geographic regions and that is helping drive increasing demand and revenue growth. Our Cementing Equipment business had robust domestic product sales in Q1 resulting in the highest quarterly revenues for this segment since the acquisition of Blackhawk in late 2016.

We also saw continued strength for our Tubular Running Services business in Africa the Caribbean as well as our US land market where we grew revenue for the 11th consecutive quarter despite a decline in the rig count. Turning to slide four, last week we announced the new segment reporting structure.

The new segments are Tubular Running Services, which we referred to as TRS, Tubulars and Cementing Equipment. This resegmentation aligns all the revenue and costs of each business into their respective segments. We've now achieved the critical alignment of financial reporting with our management structure driving accountability and streamlining decision-making.

We are now reporting corporate costs as a separate component. Let's look a bit closer into the composition of the new segments. Tubular Running Services or TRS includes the installation of casing, tubing, and completions equipment on a global basis.

These operations are carried out in land, shelf, deepwater and ultra deepwater operations in 50 countries on six continents. This was previously captured by the US services and international services segments. Our Tubulars segment was previously called Tubular Sales. This business designs, manufactures, and installs connectors and casing accessories for large-diameter heavy wall pipe.

As part of our connector business we will purchase pipe for resale for customers that want complete packages. This segment also specializes in the development, manufacture and supply of proprietary drilling tool solutions that focus on improving drilling productivity by eliminating or mitigating drilling operational problems such as casing wear, torque and drag, and drill string vibration.

The Cementing Equipment segment is comprised of what we previously called the Blackhawk segment. This segment provides specialized equipment services and products that are utilized in the construction, completion or abandonment of the well bore. This global business operates in both onshore and offshore environments.

Our corporate component includes all remaining cost that are not directly associated with the three segments. Previously, corporate related costs were substantially included in the US services segment. Finally, a portion of the shared regional operating expenses previously reported in US services and international services is being allocated across all segments based on their use of these shared expenses.

Our new business segment structure allows our operating management to better control all aspects of their operations and for investors, it provides a more accurate picture of segment profitability. In summary, we are encouraged by the relative stability of oil prices and healthier deepwater rig counts. As we look to the remainder of 2019, our plan calls for a 15% year-over-year revenue growth and approximate doubling of adjusted EBITDA

I will now turn the call over to Kyle to provide additional details on the financial results for the quarter. Kyle?

Kyle McClure -- Senior Vice President and Chief Financial Officer

Okay. Thanks, Mike. Following up from Mike's comments regarding the new segments, I wanted to drill into the changes a little further. So everyone's clear on the moving pieces. Turning to slide five, we'll take a look at the before and after view for revenues and cost movements. Our new TRS segment primarily combines the revenues of the former US and international services segments.

As a note we will no longer breakout US land versus US offshore or international TRS revenues by region for this segment. Obviously, we will provide a consolidated geographic breakdown in our SEC filings and we'll also provide color commentary on the market, but we'll no longer report these geographies separately for TRS.

Likely the biggest shift in the resegmentation is related to various operating expenditures that resided in the former US and international services segment. Let's break this down into two pieces. First, certain operating expenditures, which supported the entire enterprise, which previously resided in the US and international services segments are now to be split between the three new segments based upon various allocation methodologies.

The premise behind this being is our shared resources and support function that the other segments receive benefit from. Whether it be facilities, insurance programs or various support departments, these costs will now burden all the segments to show the true expense of running these businesses.

The second significant piece, which is being broken out into its own components is the corporate expense, which largely resided in the US services segment previously. We will report this separately going forward. To be clear, these are not cost just in Houston. This includes overhead support costs such as global legal expense, global IT expense in addition to others as well as the corporate functions here in Houston.

Moving to the remaining two segments. Notable changes to our new tubular segment would be the addition of a small drilling tools group, which was previously in the US and international services segment and was roughly $11 million in revenues in 2018, and the regional OpEx allocation. And last, the segment formerly known as Blackhawk will be known as Cementing Equipment going forward.

The only notable change is the inclusion of the regional OpEx allocation. So, in summary, we have aligned the three new segments in the corporate cost component to better reflect the true profitability of each business. This will in turn allow us to allocate capital with more discipline, drive more efficiencies within the cost structure and ultimately run a better business.

Turning to slide six. In addition to the resegmentation we announced last week, we also announced changes to our consolidated income statement, as it relates to the income statement geographies of cost, namely the general and administrative line item. The primary reclassification to G&A in 2018 and going forward would be that expenses related to bonus, stock compensation, and medical claims will now follow the employee based on our classification, cost of revenue or G&A.

If you look at the 2018 summary income statement on slide six you'll see about $32 million in cost moving from G&A to cost of revenue. Okay, now that we've got that out of the way, let's jump into Q1 results, starting on slide seven. First off, as expected, revenues were down slightly sequentially as the Tubular segments saw a reduction in pipe sales due to timing, offset somewhat by strong growth in the Cementing Equipment segment, notably strong product sales in the Gulf of Mexico.

Adjusted EBITDA was $9.7 million in the quarter down due to slight sales reduction, a slight step up in certain cost specifically relating to repair and maintenance expense in the TRS segment. As well corporate costs were higher due to insurance premiums related to higher-than-expected activity in the 2017, 2018 period for roughly $2.5 million and costs associated with the reporting segment change.

Turning to cash flow, we ended Q1 2019 with $172 million in cash and short-term investments, which was down $40.8 million versus Q4 of 2018. Working capital use of cash in the quarter was approximately $41 million driven by three factors. First, we saw accounts receivable go up by $16 million, which was largely due to a few customers, certain geographic locations, in addition to some product orders with some longer terms associated with them.

Second, payables were down $17 million due to annual short-term incentive payout, in addition to some cash taxes, and lastly, we saw some inventory restocking associated with some upcoming product deliveries. We also had CapEx of $8 million in the quarter, which is consistent with what we think we will see quarterly for 2019 at a roughly $40 million expectation for the full year.

We are targeting Q2 to be free cash flow break-even and likely to improve each quarter the rest of 2019. As we are embarking upon some significant efforts to improve our DSO, manage inventories in a generally improving business environment.

Turning to slide eight, we will take a look at the segment results, starting with the TRS segment. For Q1, the TRS segment generated $98.1 million in revenues down slightly from Q4 2018, but up 24% from Q1, 2018. US land TRS saw its 11th consecutive quarter of growth in Q1 of 2019. On the offshore front, we saw double-digit growth sequentially in the Caribbean as growth continued in Trinidad and Guyana.

Additionally, Africa saw double-digit growth to the new projects in Ghana and Equatorial Guinea during the quarter. US Gulf of Mexico was down as expected due to a mix of less completion oriented work. Adjusted EBITDA was $17.7 million in Q1 of 2019 down $3.9 million from Q4 of 2018. This was driven by the reduction in revenues and some of the offshore markets notably the US Gulf of Mexico, Europe, and Asia Pacific.

In addition, we experienced increased freight and repair and maintenance cost associated with mobilizing equipment for upcoming offshore projects. Turning to slide nine, we'll take a look at our two wheeler segment. Revenues were $18.7 million in the quarter down $3.7 million while adjusted EBITDA is up $1.3 million from the prior quarter.

Revenues were down as several pipe orders from Q4 2018 did not repeat in Q1 of 2019. Main driver of the improvement in adjusted EBITDA is the growth in our drilling tools business, which is now part of the segment. This business, albeit, relatively small as it represents about 25% of total sales for this segment, has very nice incremental margins and the mix this quarter certainly helped grow adjusted EBITDA.

Turning to slide 10. We'll take a look at the Cementing Equipment segment. Cementing Equipment revenue was up $5 million from the fourth quarter of 2018 driven by growth in offshore product sales and international services, primarily from increased activity in Mexico and the Caribbean.

The US land market was also higher quarter-over-quarter driven by record product sales. Adjusted EBITDA in the segment was $3.8 million up $2.3 million sequentially reflecting 46% incremental margin as the mix of revenues specifically in the Gulf of Mexico helped drive these results. The Cementing Equipment business continues to see promising expansion in the international markets with over 20% of revenues coming from outside of the US and new work awarded in the quarter that should help with this growth trend continue throughout 2019.

To close out on slide 11, I will take you through our Q2 outlook and the rest of 2019. We continue to expect the full year 2019 guidance of 15% top line revenue growth and 30% to 50% incremental adjusted EBITDA margins. The total company Q2 revenues are expected to be modestly up sequentially driven by international TRS expansion with adjusted EBITDA up due to TRS growth and non-recurring Q1 expenses.

With that, we will open the call to Q&A. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instruction) And we have a question from Ian MacPherson from Simmons.

Ian MacPherson -- Simmons -- Analyst

Thanks. Good morning, everybody.

Michael C. Kearney -- Chairman, President, and Chief Executive Officer

Good morning.

Ian MacPherson -- Simmons -- Analyst

Mike, I wanted to see, if I could just ask a little bit about how the TRS market offshore is developing from a pricing standpoint. Given that there is, I guess, not really tightness yet, but tightening throughout the system and where you are in your pricing cycle with regard to, I guess, maybe selective opportunities, whether it's in the Gulf of Mexico internationally, if anything is happening you have or do you think that's more going to be sort of on the comp for 2020 or later?

Michael C. Kearney -- Chairman, President, and Chief Executive Officer

Yes. Thanks, Ian. I'll let Steve get into the details of that, but as you know the postings of offshore drilling rigs have moved up quite nicely. And it always has to do whether it's what we do, what the offer drilling contractors do with supply and demand, and they're starting -- in their segment, they're starting to see a tightening of supply of certain types of rigs.

So, that's starting to propel prices. So, the corollary for us has to do with our competition. We've got local competitors that can put in bids against us as well as some of the larger competitors. And so in terms of a tightness of deliverability, we haven't quite seen the same degree of some of the offshore drilling contractors. So, our pricing offshore, it varies quite a bit by segment by market geographic market, but we are seeing a little bit of upward movement, but not anything near what some of the other offshore providers have seen.

So I'll let Steve add a little color to that.

Steve Russell -- President, Tubular Running Services

Yes. Thanks, Mike. Yes, I think, first of all, I think, the bottoms being found in offshore pricing and we're on the early stages of a recovery. Like Mike says, we're using sort of opportunistically trying to put price up as tenders come through. Our sales cycle is quite long on a number of these projects in the fact that we're tied into multi-year contracts. So that will take some time to work its way through to the bottom line results. Thank you.

Ian MacPherson -- Simmons -- Analyst

Okay. Got it. Thanks. For a follow-up, I just wanted to ask with regard to the new reporting format. I'm definitely a fan of the separation of the corporate overhead, which had been distorting your US TRS margins previously, but I guess I'm a little less enthusiastic of your bundling, the US land and Gulf of Mexico business going forward from a disclosure standpoint, and I guess I wanted to ask in your SEC filings, will you consider to provide granular breakouts of US land and Gulf of Mexico and if not, is that really competitively driven or is it more of just an internal business organization impetus that's resulted in that combination of those two segments?

Kyle McClure -- Senior Vice President and Chief Financial Officer

Yes. This is Kyle. It's not competitively driven whatsoever. In our SEC filings, we will have consolidated geographic breakouts, but not down to the segment level, as we had previously understand, there might be some lack of visibility there. We'll continue to get color commentary on those particular markets as needed, but it's nothing more than this is just from a reporting standpoint how we are going to do going forward, there's no competitive lean on this whatsoever.

Ian MacPherson -- Simmons -- Analyst

Got it. Thanks, Kyle.

Kyle McClure -- Senior Vice President and Chief Financial Officer

Thank, Ian.

Operator

(Operator Instructions) Our next question comes from Mike Urban from Seaport Global. Mike, your line is open.

Michael Urban -- Seaport Global -- Analyst

Sorry, I had you on mute. Good morning.

Michael C. Kearney -- Chairman, President, and Chief Executive Officer

Good morning, Mike.

Kyle McClure -- Senior Vice President and Chief Financial Officer

Good morning.

Michael Urban -- Seaport Global -- Analyst

Just kind of following up on the last question and not trying to recreate the previous reporting, but just more broadly on a geographic basis. I think, if you just look at overall spending levels, I think, kind of for US onshore. I think for the market maybe we're looking for a little bit of a decline in spending year-over-year especially as it pertains to more drilling related businesses, and then international kind of high single maybe 10% kind of growth. I'm just wondering what your outlook is relative to that just without putting words in your mouth, but think that the international outlook could be a little better as you continue to roll, excuse me, roll the previous Blackhawk segment out on the international platform, but just would be interested on your thoughts and kind of the growth rates relative to the market expectations?

Michael C. Kearney -- Chairman, President, and Chief Executive Officer

Yes, I mean, I think we've talked about this little bit in our guidance the past few quarters. International markets are a little bit of a mixed bag. I do think we're seeing some and we'll talk about Blackhawk here separately, but we'll first split this apart between the TRS piece and how Blackhawk is coming along.

Obviously, the international piece is a significant chunk of the TRS component. If go back in time with international of course you have a size of that particular business for us, but I think if you look around the regions, you look at places like Africa, the Caribbean and very select markets there, you're seeing some pretty substantial growth rates coming up year-on-year. You have some other markets such as Europe that are coming up nicely due to some work that's been won over the back half of last year.

Gulf of Mexico, I think, we've kind of look at as a little bit of a mixed bag as well our TRS business, if I look at as being slightly up to flat and then Blackhawk a little bit of a up and down throughout the year based upon product sales and various rigs in and out.

So, I don't think we can take a look at the international pie and say it's all go in one direction. I think you're seeing some pockets of some nice growth as rigs have come into particular markets and the market share gains we talked about at the end of last year, we're going to get a full year's worth of here in 2019. And that's why you'll see as the TRS segment goes on throughout the year, we'll likely see those international pickups and market share play through.

On the international side for Blackhawk we're expecting that not double this year, but be up pretty substantially and it's becoming much larger piece of their business as well as they penetrate and go along to new market they haven't been to before, and we've spent a decent chunk of CapEx here in the last two or three quarters on getting cement heads built, certified into international markets, they haven't previously been into, but I think the international market in general are a good story. They're probably going to be growing a little bit faster than the overall market within our businesses.

Michael Urban -- Seaport Global -- Analyst

And then, US onshore, any reason why you would deviate much from the market there?

Michael C. Kearney -- Chairman, President, and Chief Executive Officer

Well, we will, I mean, I'll let Scott talk a little bit about this, but our TRS business is probably going to pop along with the market more or less. We might pick up some pricing here or there may be better exposed in certain basins. On the Blackhawk side of the house or cementing as we're now calling it, they've got a pretty robust growth projections for the US land as they're getting into new markets that they really haven't been in historically and they've got some pretty exciting new products that are coming out. I'll let Scott maybe talk about that.

Scott A. McCurdy -- President, Blackhawk Specialty Tools

Sure. Thanks, Mike. For our land business, I mentioned on the last call, but we're still relatively small and underrepresented. So as long as we have a good rig count whether it's up or down a little bit, it's not a huge factor. Just a couple of highlights of things that we've been doing.

We just opened a large base out in the Permian area, seeing a lot of growth there, focused on the Oklahoma City kind of Oklahoma market and rolling out through kind of our TRS footprint there, and also introducing some new products and pushing our downhole service tools into the market.

So, we've seen nice, we've seen growth in the first quarter even with the slight drop in rig count and we expect that to accelerate over the remainder of the year as some of our new products continue to gain traction.

Michael Urban -- Seaport Global -- Analyst

Got you. That's all from me. Thank you.

Michael C. Kearney -- Chairman, President, and Chief Executive Officer

Thanks.

Operator

(Operator Instruction) We have no further questions at this time. I will now turn the call over to Mike Kearney, Chief Executive Officer.

Michael C. Kearney -- Chairman, President, and Chief Executive Officer

The offshore markets globally continue to improve and the land markets are stable, all of which leaves us to believe will turn in an improved 2019 performance. A great deal of work has gone into the business resegmentation and we are convinced it will give us greater operational clarity and drive better accountability and improve results.

We look forward to keeping everyone informed and updated on our progress. I want to thank everybody for their continued interest in Frank's International.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 25 minutes

Call participants:

Erin Fazio -- Investor Relations

Michael C. Kearney -- Chairman, President, and Chief Executive Officer

Kyle McClure -- Senior Vice President and Chief Financial Officer

Steve Russell -- President, Tubular Running Services

Scott A. McCurdy -- President, Blackhawk Specialty Tools

Ian MacPherson -- Simmons -- Analyst

Michael Urban -- Seaport Global -- Analyst

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