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Frank's International N.V. (NYSE:FI)
Q4 2019 Earnings Call
Feb 25, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Q4 2019 Frank's International Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator Instructions].

I'll now turn the call over to Blake Holcomb. Blake, you may begin.

Blake Holcomb -- Director of Finance and Investor Relations

Good morning and welcome to the Frank's International conference call to discuss the fourth quarter and full-year 2019 earnings. I'm Blake Holcomb, Director of Finance and Investor Relations.

Our speakers for today, as shown on Slide 2 of the earnings presentation, are Mike Kearney, Chairman, President and Chief Executive Officer; and Melissa Cougle, Senior Vice President and Chief Financial Officer. Joining Mike and Melissa for the Q&A portion of today's call will be Steve Russell, Senior Vice President of Operations; Nigel Lakey, Senior Vice President of Technology; and Thad Scott, Senior Vice President of Marketing and Business Development.

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 Investor section of our website at franksinternational.com.

On today's call, Mike will provide an overview of 2019, an update on our profitability improvement project as well as the segment technology highlights. Melissa will then review the financial performance of the fourth quarter and give a brief review of our share repurchase program. Additionally, she will give general guidance for the first quarter and full year 2020. We will close with a question-and-answer session.

Before we begin commenting on the fourth quarter and full year 2019 results, there will be a few legal items that we will like to cover beginning on Slide 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 any forward-looking statements. And 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.

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 fourth quarter and full-year 2019 earnings release, which was issued by the company earlier today.

I will now turn the call over to Mike.

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

Thank you, Blake. We appreciate everyone joining us today for the call. Beginning on Slide 4, I will discuss some of the highlights of 2019. Our fourth quarter results wrapped up a solid year for Frank's, as we delivered double-digit top line growth and improved our adjusted EBITDA by more than 70% year-over-year despite a slowdown in the US onshore market in the latter half of the year. We continue to expand our cementing equipment and drilling tools offerings to new markets globally, seeing revenues increase more than 30% for cementing equipment and more than 80% for our drilling tools compared to 2018 levels. This growth demonstrates the value proposition of these products and services to our international customers and we expect this trend to continue as our current customers as well as prospective customers become familiar with the benefits of our technologically advanced solutions.

On the tariff side, in 2019 we continue to secure new contracts and tender awards with our customers on a worldwide basis. The combination of these 2019 wins led to for the first time Frank's becoming the global revenue market share leader for casing and Tubular Running services. This is according to a well-known independent third-party market research firm. We have always held that we are the high value low risk provider of Tubular Running Services and it's gratifying that our customers agree by awarding us a significant share of their business. Additionally, we have secured several more new contracts, which are slated to start in the second quarter in Europe, Asia and West Africa.

We also recently secured new significant multi-year contracts with major customers in the US and internationally for our cementing equipment and drilling tool service lines. Due to the multi-year nature of these contracts, we will enjoy revenue growth in 2020 and beyond with these customers. These awards demonstrate our customers' confidence in the value proposition, our rotating [Indecipherable] reduction and torque, reducing technologies bring to their operations. In some cases, our customers made us the exclusive supplier of these services. We are proud of these new awards not only because of the recognition of our technology, but also because they speak to the relentless focus we place on service quality and our safety record.

In our last call, we discussed the details of our profitability improvement plan, and today we will update you on our progress. To briefly recap, during the summer of 2019, the management team performed a detailed diagnostic study along with the assistance of a consulting firm to evaluate our cost and operational structure. By the time the analytical phase was concluded in late August, we had identified 20 distinct areas of our operations and cost structure where efficiencies could be realized to improve overall profitability. We then established a program management office staffed with several senior level managers supported by the consulting firm to craft specific implementation plans and begin the execution of those plans. We said at the time the goal of the profit improvement initiatives would be to increase adjusted EBITDA by $30 million in the short term. We also set our ultimate target was a $45 million annualized increase in adjusted EBITDA and those further actions would be completed no later than 2021. Based on the actions completed the date, we now have line of sight to the $30 million of cost savings in 2020 compared to 2019 and the majority of these actions to realize these savings are now complete.

I would like to address a few of our focus areas to provide more granularity on actions taken. We took a hard look at our technology development and delivery organization. While Frank's has historically had industry leading technology we had three distinct engineering organizations in each of our segments, [Indecipherable] tubulars and cementing equipment. Upon review, we realized we were pursuing too many technology ideas in a somewhat siloed management structure. We believe that different structure would provide greater focus and lead to faster and more cost effective commercialization of our technology. We now have all engineering and product service line development and management under one organizational structure. We're shortening our time to market and concept to cash cycle. The financial governance over technology development is more precise and we now have specific budgets and timelines for each development project. This new structure gives us an improved ability to respond to the voice of the customer and provide them with the services and equipment they need to optimize their operations. As a result of this comprehensive engineering and technology review, we've discontinued certain projects and consequently have written off any associated capitalized costs. Our accelerated commercialization process we'll bring our customers the best technologies sooner and allow them to drill case and complete wells faster and safer.

This focus on our most compelling projects reinforces our commitment to remain the innovation leader in our product and service lines while dedicating resources to those projects that have the greatest potential for successful commercialization and profitability. We've also taken steps to improve the efficiency of our field support organization and have taken actions in the fourth quarter of 2019 and the first quarter of this year to eliminate redundancies and increase the productivity of support personnel. We will continue to manage our business and measure our profitability on a segment basis. However, we have pushed the management of much of our field support cost structure under the purview of our regional geographic leaders. We now have better direct accountability of not only revenue, but also because residing in our geo markets. These changes have led to reductions in our workforce primarily in the operational support structure.

While headcount reductions are never easy, they became necessary to right size our organization. We value our people as our most important assets and it actually increased our training much of it executed by our internal learning and development team. This is a cost effective way to invest in our employee base and provide a highly competent service and delivery team to our customers. I want to personally thank all of our employees for their contributions and dedication as we've all had to embrace a leaner more agile organization while at the same time continuing to provide safe, high quality service to our customers.

Before turning the call over to Melissa to discuss in more detail our financial performance, I would like to highlight several notable technology achievements. During the last quarter, we made the first successful run of our 36 inch extreme three connector with an international operator in the Gulf of Mexico. Top hole casing sections in deep water drilling programs required a large diameter casing and connectors and these springs can experience installation and operational challenges inherent in deep water environments. Frank's extreme three casing connector technology provide operators with a high value, low risk solution to top hole casing installation challenges these connectors help reduce installation time and provide superior performance when confronted with high tension compression and bending loads. Our connectors provide the operators with assured casing integrity over the life of the well.

In Europe, we recently deployed our mechanized remote boxing device. This is a handsfree mechanized pipe control system used to guide pipe to the well center, replacing the traditional manual stabbing guides and removing personnel from the red zone. France [Phonetic] is laser focused on meeting the demands of our offshore customers. They require high levels of process automation, having fewer persons on board, keeping personnel out of the red zone and cross training our employees for multi skilling. Our boxing device addresses these expectations because it's remote operation means our employees and those of our customers can avoid the risks associated with dropped objects, manual handling, uncontrolled movement, and other red zone risks.

I look forward to providing updates on future calls regarding the progress we are making in bringing innovative technologies to our customers.

I will now hand it over to Melissa to discuss our financial results and Q1 outlook in further detail. Melissa?

Melissa Cougle -- Senior Vice President and Chief Financial Officer

Thank you, Mike. In reviewing our financial results for the quarter, we generated $139 million of revenue, which was flat from the previous quarter and down 4% from the fourth quarter of 2018. During this quarter, we experienced our normal year-end seasonality decline, as well as continued softness in the US onshore market. Additionally, a few of our larger international drilling programs idled at year-end. These declines were partially offset by improving product sales in the Tubular segments from third quarter lows. Our Q4 adjusted EBITDA totaled $14.7 million and was impacted by $1.3 million of additional customer bad debt reserves at year-end, half of which was attributable to one customer in Asia-Pacific region, who went into liquidation abruptly during the quarter.

To reiterate for the full year 2019, as shown on Slide 5, the company generated double-digit top line growth despite a significant slowdown in the US onshore market. We also improved our EBITDA in this environment by over 70% and generated year-over-year incremental margin of 42%. We began generating positive free cash flow during the second quarter and generated $25 million of free cash flow during the second half of the year. As Mike indicated in his comments, we incurred significant impairments during the quarter. We dove deeply into our organization and structure through our profitability improvement measures and determined that the goodwill related to our cementing equipment segment was impaired, and that certain portions of our asset and project-based needed to be reevaluated and ultimately impaired as well. These impairments drove our net loss to $168 million for the quarter, excluding these irregular items, our adjusted net loss improved sequentially and year-over-year, totaling $13.1 million and we're looking forward to 2020 with a rational asset base, which we feel will position us for growth in the future.

Turning to Slide 6. Our TRS revenues declined sequentially, primarily due to a decrease in US onshore revenues and some idled international projects at year-end. However, we did see full-year revenue improved by 11% from 2018 as well as a 37% improvement in adjusted EBITDA. These improvements were driven by significant additional international revenue contribution, specifically in Africa and Latin America. These additional revenues were also associated with higher margins. These improvements were offset by the deterioration in the US onshore market beginning in Q3. We closely monitor our US land business and expect we will see declines year-over-year in our domestic onshore revenue as the full year impact of the 2019 decline is felt in 2020. However, we are seeing signs of stabilization in the US onshore rig count and are hopeful the market will not deteriorate further from its current state. During the first quarter of 2020, certain of our international TRS projects have yet to recommence operations and this will affect our quarter-over-quarter performance. Several contract awards occurring during 2019 and they're scheduled to begin in the second quarter of 2020. This will help drive our planned year-over-year growth in this segment.

In the Tubular segment, as presented on Slide 7, the fourth quarter provided for a rebound off the third quarter low coming in at $21.2 million in revenue and $3.1 million of adjusted EBITDA. This was driven by some delayed orders in Q3 being delivered prior to year-end, as well as the pull forward as some deliveries scheduled for Q1, 2020. For the full year 2019, our drilling technologies business was up 80% year-over-year. This business is relatively small in comparison to the size of the full Frank's organization, but we are excited about the increasing adoption of these tools globally and are cultivating the business to be more impactful in the coming years as it continues to grow. Muting this growth somewhat was a year-over-year 10% pullback in our Tubular's product business due to the schedule shifts and reductions in some customer drilling programs. During 2020, we are investing in new Tubular technology, which will provide us improved access to customers and a path to more sustained growth. Combined for both of these businesses this segment experienced modest revenue and adjusted EBITDA growth year-over-year. Quarter-to-quarter revenue and adjusted EBITDA in this segment can vary based on timing of delivery and we are working on continued market share gains that will lead to smoother and more predictable revenues in the coming years.

Concluding the segments on Slide 8. Our cementing equipment segment revenue increased 10% year-over-year. Although, the US onshore impact did cause a 3% decline sequentially. Revenue in international markets and the US Gulf of Mexico have continued to improve offsetting the land declines. Adjusted EBITDA was up 40% from the prior quarter, due to higher contribution from offshore rentals and services as well as lower costs from profitability improvement actions. On a full-year basis, the cementing equipment segment grew revenue 18% and adjusted EBITDA increased 63%, with 34% incremental margins. Much of this growth was driven by a 33% increase in international revenues, which now account for more than 20% of the segments total revenue compared to less than 2% in 2017. We are now seeing critical mass develop in international markets with this segment, partially through serving our traditional customers outside of the US, but also by gaining several foreign national oil companies a cementing customer's for the first time. We are optimistic about the momentum that this will create for us in the future, which we believe, will more than offset the pullbacks in the US onshore markets.

Moving to our expectations for the first quarter of 2020 on Slide 9. We are anticipating a decline in our results quarter-over-quarter. This decline is anticipated based on a combination of short term drilling programs schedule changes for some of our international customers, timing of tubular products sale deliveries and certain contracted rigs in the US Gulf of Mexico undergoing maintenance. Despite the slower start in the first quarter of 2020, we have several new projects and contracts scheduled to begin in Q2 and later in the year, and we remain confident in our ability to meet our previously communicated target of adjusted EBITDA exceeding $100 million in 2020 at this time. To reiterate, the Q1 low we are forecasting is not indicative of the very robust 2020 we anticipate with another year of adjusted EBITDA increases over 70% in a market where customer spend is up single digits.

Our view of 2020 assumes no significant deterioration in commodity prices or drastic impacts to regional operations from events associated with the coronavirus. While our customers have not given us any indication of delays, these factors could result in changes that negatively impact our outlook.

Finally as mentioned in our press release issued earlier this morning, Frank's management will be initiating a stock repurchase program this year of up to $40 million, funded out of free cash flow. As a management team, we place a high priority on appropriately allocating financial resources toward the opportunities that offer the highest rate of return on investment. Whether it involves the use of these resources to build new equipment, invest in technology, or consider acquisitions, we maintain our focus on taking the actions that create long-term value for the company and its shareholders. In our view, the opportunistic repurchasing of shares is another way to benefit our shareholders. At current price levels, we believe the repurchase of shares is an inappropriate use of capital and setting aside a portion of our free cash flow to this repurchase presents an attractive return on investment that will create value for our shareholders over the long-term.

With that, we will now open the line for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instruction] So we have no further questions. I'll turn the call back over to Mike Kearney for final comments.

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

Okay. Thanks Adrienne. To include our 2019 adjusted EBITDA was up more than 70% compared to 2018. Following that very strong improvement, we believe 2020 adjusted EBITDA will once again exceed the prior year by over 70% and overall market that's growing in the single digits. The Frank's management team and entire employee base understand the importance of being cost conscious and generating free cash flow.

Thanks for joining today's call and we look forward to further updates on future calls. Good bye.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

Blake Holcomb -- Director of Finance and Investor Relations

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

Melissa Cougle -- Senior Vice President and Chief Financial Officer

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