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Frank's International N.V. (NYSE:FI)
Q1 2020 Earnings Call
May 12, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Q1 2020 Frank's International N.V. Earnings Conference Call. My name is Zanera and I'll be the operator for today's call. [Operator Instructions]. Later we'll conduct a question-and-answer session. [Operator Instructions]. I will now turn the call over to Ms. Alison Greene. Alison, you may begin.

Alison Greene -- Manager, Corporate Communications

Good morning, and welcome to the Frank's International conference call to discuss first quarter 2020 earnings. I'm Alison Greene, Manager of Corporate Communications. Our speakers today as shown in 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.

A presentation has been posted on our website that we will refer to throughout this call. If you'd like to review this presentation, please go to the Investors section of our website at franksinternational.com. On today's call, Mike will provide an overview of the first quarter, our response to the COVID-19, the substantially lower oil and gas prices, and reduced industry activity. Additionally, he will review technology highlights and provide a brief update on our profitability improvement project and our efforts to further reduce our cost structure.

Melissa will then review the financial performance of the first quarter and provide a more in-depth review of our cost reduction initiatives. We will close with a question-and-answer session. Before we begin commenting on our first quarter 2020 results, there are a few legal items that we would 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. 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.

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 2020 earnings release which was issued by the Company.

I will now turn the call over to Mike.

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

Thank you, Alison. We appreciate everyone joining us for the call. I want to begin my remarks by acknowledging the challenges we're facing across our industry. Along with our industry peers and customers, we're experiencing the unprecedented impacts caused by the COVID-19 pandemic and falling oil prices.

These events have affected our first quarter results, and will continue to impact us for some period of time. Our current actions and those we plan to take over the next quarter will prepare us to respond to a number of potential recovery scenarios. We are focused on controlling every aspect of our business, continue to be very proactive as the situation evolves.

Turning to Slide 4, as the severity and the geographic spread of the COVID-19 outbreak became more apparent in early 2020, Frank's implemented a series of actions to ensure the safety of our employees, their families, and our customers while maintaining business continuity. We also moved quickly to find additional ways to control our costs. I want to congratulate our employees for their ability and willingness to adapt to new ways of working including rigorous safety protocols, while at the same time meeting customer requirements and commitments.

Our laser focus on safety has brought about the welcome result of just one recordable injury during the first quarter, which is a Company record. In the Gulf of Mexico, we recently celebrated one year without a single recordable incident with over 1.6 million man-hours worked. In Abu Dhabi, we recently celebrated 1,000 days without recordable incident. These remarkable records demonstrate the Company's commitment to all aspects of ESG. I'm proud that the Frank's team has risen to the occasion of working in these challenging environments.

Despite the strong headwinds, Frank's continues to be in an excellent financial position due to the fact we have no debt and substantial cash on the balance sheet.

Our financial strength will allow us to weather the current market conditions better than most. Since we have the largest global market share in our primary line of business, this gives us a resilient revenue base with the potential to gain additional share as smaller competitors will grow. We are a Company centered around technology and safety with an offering that reduces the time to drill, case, cement, and complete wells.

In response to the recent impacts of COVID-19, and the oil price disruptions, we are adapting our operations to be responsive to our customers in all of our global locations. In our offshore markets, we see our clients working hard to continue projects and complete work scopes while dealing with the COVID-19 related challenges. While some new start-up projects were being delayed, we believe most will commence as soon as there is a relaxation of COVID-19 restrictions, and some degree of oil price stability.

Middle East activity has remained generally strong including the increased TRS activity, and market share gains in key markets. We were recently awarded a significant new five-year TRS contract in this region, scheduled to start up in late Q2 of this year. Our operations in Africa have seen negative impacts related to COVID-19 and oil price concerns, several major operators slowing or temporarily suspending their drilling programs. The good news is, we have been awarded several key contracts, although start-ups have been delayed. Newly awarded multi-year projects in both West and East Africa are anticipated to start up in the latter half of 2021.

Offshore projects in South America have proved relatively resilient to COVID-19 impacts with limited postponements and cancellations and some activity increases associated with awards from last year. Within our North American offshore region, core customers are generally proceeding with drilling programs with some delays and downward revisions to 2020 capex budgets. A major Caribbean project initially warm stacked two offshore rigs out of a four rig project in response to COVID-19, but we anticipate a return to full operational capacity in Q2 with a fifth rig committed to Frank's in the second half of 2020.

Our Cementing Equipment division has recently been awarded 100% of the service tool work for this multi-rig project, which is a huge win for Frank's. As everyone knows, the US land market has contracted significantly, and we have responded by downsizing our footprint and staffing levels accordingly.

Technology has always been a key differentiator for Frank's and our technology division has recently undergone a realignment that will enable us to be more responsive to the voice of the customer and ensure engineering projects are prioritized around the mantra of innovation with a purpose. Simply put, we will aggressively invest in R&D and product development when there is either a committed contract or a very high likelihood of a business opportunity.

We will continue to work with customers to develop better solutions, but will not engage in build it [Technical Issues] and they will come [Phonetic] speculative technology projects. Our focus is safety-based, hands-free, remotely operated equipment, that keeps our employees and those of our customers out of the red zone. Offshore operators are focused on fewer persons onboard as each additional 24-hour shift slot can cost upwards of $1 million per year. Both drilling contractors, as well as operators, complement Frank's for its highly trained personnel who can multi-task and help with various onboard jobs.

We have scaled our R&D development plan to create focus, and while we are meeting all development goals, we now will still be able to reduce R&D costs 40% year-over-year. As an example of our safety-enhancing technology, I'm pleased to report that following its finalist designation [Technical Issues] at the 2019 World Oil Awards, the Frank's Rack Back Console achieved additional recognition in March of this year as a recipient of the Hart's Special Meritorious Award for Engineering Innovation.

The risk of dropped joints or stands of tubulars during stand building operations poses a significant threat to the safety and will significantly disrupt operations. Frank's Rack Back Console presents the unplanned release of tubulars with a mechanical programming that guides the operators through a pre-programmed sequence. It has been successfully deployed in various regions of the world and is capable of building or breaking down doubles, triples, or quadruple stands of tubulars.

Turning to Slide 5. As mentioned earlier on the call and detailed in our earnings press release, we have scaled up our cost reduction initiatives in response to current conditions. To protect our balance sheet and maximize our cash flow, Frank's has intensified our efforts to examine and reduce our cost structure. We are leveraging the knowledgeable gain in our profitability improvement project and accelerating the actions already in progress.

We are intensifying our rationalization of capital expenditures and deploying even greater discipline. All of the 2020 planned capital expenditures have been revisited individually, and we have sanctioned only that capex for which there are undrawn contracts in place. Melissa will provide more detail on these initiatives in a moment.

We have made significant progress over the last three quarters and this has enabled us to jump-start renewed cost containment actions since the onset of new industry challenges over the last two months. While market conditions and unknowns related to COVID-19 will continue to pose a large degree of uncertainty in the near-term, we will continue to respond thoughtfully and effectively to ensure we weather the current perfect storm while meeting our customers' needs and maintaining our position as the high-value low-risk provider.

In concluding my remarks, I would ask each of you to think of how many service companies have survived the industry cycles over the last 80 years with no debt and substantial cash on the balance sheet. It's a very, very short list, and Frank's is at the top of that list. We are proud of our great history and outstanding employees. If you are employed, be proud, if you're a customer, we are there for you in good times and bad. It's easy to get lost in the flurry of bad news we hear every day. I just ask that you remember that Frank's always has, and always will not only survive, but thrive.

I will now turn the call over to Melissa Cougle, Chief Financial Officer who will discuss the Q1 financial results.

Melissa Cougle -- Senior Vice President and Chief Financial Officer

Thank you, Mike. Referring to Slide 6, during the first quarter of 2020, we generated $124 million of revenue, which was down from both the previous quarter and the first quarter of 2019. As discussed on the last call, we were anticipating a decline this quarter with new contract start-ups planned later in the year.

In addition to this anticipated decline, we saw some early impacts of shutdowns related to COVID-19 that occurred during our March period. The most significantly impacted segment was our Tubulars business, showing a 41% decline from the fourth quarter of 2019 as customer pipe deliveries that were planned for Q1 were delayed.

Our Q1 adjusted EBITDA totaled $7.1 million and was impacted by several factors including contract ramp up costs for works that was anticipated to begin during Q2. We also had reserves associated with our current expected credit losses that were significantly higher than anticipated in light of the current market conditions. These reserves totaled $1.4 million in the quarter.

Given the significant macro events occurring during the first quarter, it was necessary to revisit our core assumption supporting the intangible assets on our balance sheet. The results of our analysis concluded in various impairments to both long-lived and intangible assets, the largest of which was a $56 million impact to goodwill. These non-cash impairments had a significant impact on the net loss reported of $86 million for the first quarter.

And looking at our liquidity, the Company used $22 million in operating cash flows during the first quarter. This was due to a combination of factors including outlays for bonus payments, property taxes, and severance, as well as poor customer collections during the month of March.

During the month of April, we placed a strong focus on reengaging customers to ensure payments were once again flowing, and collected receivables improved by 80% between March and April. As of the end of April, the Company had cash and cash equivalents of approximately $185 million, up $14 million from the prior month-end. The Company spent $10 million on capex this quarter, which also affected our free cash flow and largely represented commitments made during 2019. We have reaccessed our planned expenditures for the year, and reducing them by approximately 50%.

Turning to Slide 7, our TRS revenues and adjusted EBITDA declined both sequentially and year-over-year. Much of the revenue decline was expected as we had several drilling programs that were anticipating IO [Phonetic] periods between wells, and new contract start-ups were not planned until Q2. However, during March, we did see impacts with the onset of COVID-19 related reactions, and commodity price decline.

Our US onshore operations were most notably affected with revenue falling over 27% from prior-year levels. TRS adjusted EBITDA was materially affected by these revenue declines as certain one-time costs this quarter including certain operational start-up costs in Latin America as well as the credit loss reserves associated with the new accounting pronouncement. We are monitoring US onshore rig counts weekly and have seen additional significant declines in the period since March 31st. We will continue to respond aggressively to these declines.

In the Tubular segment, as presented on Slide 8, the first quarter revenue was $12.5 million with $1.4 million of adjusted EBITDA. A series of deliveries anticipated for Q1 were delayed or canceled in both our Tubular Technologies line, as well as our Drilling Technologies. We were able to reduce our cost base in this segment, and keep margins above 10%. The Company believes that international growth opportunities for our Drilling Technologies remain strong. However, they will likely be delayed given current market circumstances.

Concluding the segments on Slide 9, our Cementing Equipment revenue for the quarter was $21.5 million, a decline of 14% from the prior quarter predominantly related to continued declines in US onshore and drilling program changes in the US Gulf of Mexico. Adjusted EBITDA declined $2.5 million associated with fall through from these revenue declines.

Mike previously mentioned our efforts around further cost containment and protecting our balance sheet. We have identified three primary categories of containing costs and maximizing cash flow, including a focus on labor cost reductions, non-labor expenditures and capex, and working capital management. Current and projected reductions to customer activity have required us to place even closer scrutiny on rightsizing our workforce to align with business conditions.

Turning to Slide 10, as part of our initial profitability improvement actions, we have already reduced the total compensation cost by 6% providing over $20 million in labor savings. In addition to workforce reductions, we are also capturing labor savings related to compensation and benefit changes that will provide an incremental savings of $8 million. We have completed and have additional actions forthcoming that will reduce our total labor cost in 2020 by more than 20% from 2019 levels. And we will be attuned to the need to continue to reduce costs in relation to business activity.

Our second cost containment initiative is focused on reducing operational expense structure as well as G&A expenditures. We are actively engaged with our vendors in negotiating discounts and improved terms and are closely examining open purchase orders to find opportunities to differ, reduce, or eliminate planned expenditures.

We have a newly formed task force for reviewing purchase orders each week. Our recent efforts curtailed April PO spend by 60% compared to the trailing 12-month average. These savings are in addition to the reductions in R&D spend associated with our technology division, which Mike mentioned earlier.

Capital expenditure and working capital management is our third effort and we are working toward a goal of positive free cash flow generation for the full year of 2020. We have intensified our accounts receivable collections through active customer engagement, and noted a marked increase in our cash collections during the month of April. Our budgeted capital expenditures underwent a comprehensive review, which resulted in a 50% reduction in planned capex spend for 2020. We have also reduced our commitments for inventory purchases by over 50% for large diameter pipe.

The senior executive team has been highly engaged in leading all of these efforts, and we will continue to identify and secure further savings during the coming months. To reiterate, we expect the combination of these initiatives to result in year-over-year reductions of more than 20% in our overall cost base, equivalent to savings in excess of $100 million from 2019 spend levels. This demonstrates our strong commitment to control our costs in this downturn, as we strive for positive free cash flow for 2020.

And looking forward, we anticipate material declines in both our top and bottom-line results over the next two quarters as drilling program delays are likely to continue, and program suspensions already in effect may remain in place. We do anticipate that early Q3 will provide for a troughing of activity and our expectation is that a gradual improvement for US offshore and International activity will begin toward late Q3 coinciding with some previously announced contract start-ups.

With that, we will now open the line for your questions. [Technical Issues] Good morning.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from George O'Leary from TPH & Company. Please go ahead. Your line is open.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Good morning, guys.

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

Good morning.

Melissa Cougle -- Senior Vice President and Chief Financial Officer

Good morning.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Yes. Melissa, I thought one of your last comments was interesting and Mike, you touched on this a little bit too, but there are some pockets of resilience based on kind of contract awards that you guys already have in hand. I wonder if you could share more on what geo markets you actually think will prove the most resilient as we look back in the rearview at the end of 2020 and what some of those geo markets are that are specifically driving growth for you guys? I know you mentioned Oman is one, but in the deck, but any others would be super helpful.

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

So, I've got Steve Russell here also to help us with the Q&A. And since that's a great operational question, we'll let Steve take that one.

Steve Russell -- Senior Vice President, Operations

Yeah. Thanks, Mike, and good morning, George. As we've been forecasting forwards here, we've seen some marked difference in the various geographies of what we see, particularly we see some pretty decent resilience in the Middle East, not just through contractual awards, but we've picked up some additional market share in Saudi there, in addition to the noted win in Oman.

The other place where we see some strength is the Caribbean. We've had some activity reductions due to COVID disruptions here in Q2, but we see those rigs going back to work here at the end of Q2, and more rigs coming into that market. So those are a couple of bright spots in a generally challenging environment.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

All right, that's helpful. And then I wondered if you guys can compare and contrast what you're seeing internationally in offshore markets versus what you're seeing in onshore markets and kind of the delta and velocity of reaction to the lower crude oil price and kind of COVID impacts, and how that's all played out just how offshore is behaving differently versus onshore markets thus far in 2020.

Steve Russell -- Senior Vice President, Operations

Yeah. So it's a quite complex picture as you can appreciate out there. What we've seen internationally in the offshore markets is a distinction between what I would call the remote markets and the core markets. So we've got a number of sort of remote markets, the African markets, again the Caribbean that I just mentioned where there has been some short-term disruption around COVID primarily related to getting current equipment in and out of these countries that are closed because of COVID restrictions. We do see a lot of those projects going back to work here in the latter half of the year.

On land, I'm not sure if you were referring to US land or International land. I think international land for us is very focused on the Middle East, which again I mentioned has been a strong spot for us for looking forward for this year.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Okay, great. That's a very helpful color. And then just one more from me, you guys talked a little bit about working capital management and the improvement in accounts receivables collections is quite impressive. I wonder if there were any -- I mean in April that you mentioned, I wondered, if there were any kind of bogeys or benchmarks that we could watch for as the year progresses from a DSO's perspective, from an inventory work down perspective. Any kind of guidepost you guys are trying to achieve for the year.

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

Yeah. I'll start on that George and let Melissa pick up on it. DSO is -- and reducing it is a -- it's really quite a complex issue without belaboring it, it all starts with the contract you sign, invoicing terms. We are invoicing a number of locations globally, and we've got customers that are changing their payable systems. It seems like almost monthly, and sometimes we get delays, where an operator says, you know, gee, we can't pay you for the next 30 days or 45 days as we're converting the system. So it gets really, really complex. But I can tell you, I personally over the next few months, I'm going to be working with the rest of the management team to really focus on working capital management, particularly our AR collections.

But as I've said, it's a continuum of activities from contracting, getting the correct invoice out the door, and then making sure the customer pays and they can be slow and sloppy sometimes. So it's a complicated continuum and we're going to work every piece of that along the way. Melissa, I don't know if you want to add something from your side.

Melissa Cougle -- Senior Vice President and Chief Financial Officer

I think I would reinforce everything that Mike said. I think largely, the work from home paradigm greatly impacted the collections in the month of March. And, we were able to really kind of mobilize a task force to try to reverse that trend as quickly as we could in the month of April. I think we will be faced with needing to continue to apply a lot of resources to stay on top of it. But I think there's a lot of optimism internally that, if we apply a lot of the resources, and we keep the customer engagement level high, then we can further improve from where we're at and free up further working capital on the DSO side, if you will, the receivable side.

You also asked about inventory. I'll sweep that out even more toward the capex. To say I mentioned in my remarks around the pipe inventory, which is a big piece of commitment for us. So we feel like we've really sort of looked at all of that and took that away for the year, but as it relates to the rest of the inventory, the PO task force that I also mentioned, that's part of it, and what we really do is we look at any equipment needs, right.

So Steve was in my office today saying well, hey, could we space and we freed up this piece of equipment from this location? I think that applies to inventory where it makes economic sense to try to deploy it between regions as well as just our capex. So taking and utilizing our tools more efficiently.

We were planning for a very different year than the one that has come to pass, and so we've tried to be really nimble and every time a need for a piece of equipment comes up, that we look everywhere in every location to see what is available and I think that applies for our larger pieces of inventory as well as our capex.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Great. That was super helpful color guys, I'll turn it back over.

Operator

Thank you. [Operator Instructions]. And I'm not showing any further questions at this time, I would like to turn the call over to Mr. Mike Kearney. Please go ahead.

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

Yeah, thanks very much. And I'd like to thank everyone for joining us today on the call and your interest in Frank's International and we look forward to providing another update next quarter. Goodbye.

Operator

[Operator Closing Remarks].

Duration: 28 minutes

Call participants:

Alison Greene -- Manager, Corporate Communications

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

Melissa Cougle -- Senior Vice President and Chief Financial Officer

Steve Russell -- Senior Vice President, Operations

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

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