Blake Holcomb - Frank's International NV Douglas Gray Stephens - Frank's International NV Jeffrey J. Bird - Frank's International NV Kyle F. McClure - Frank's International NV.

Ian Macpherson - Simmons & Company International.

Good morning and welcome to Frank's International Fourth Quarter and Full Year 2016 Earnings Conference Call. My name is Vanessa, 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. Please note that this conference is being recorded.

I will now turn the call over to Mr. Blake Holcomb. You may begin, sir..

Thanks, Vanessa. Good morning, everyone, and welcome to the Frank's International conference call to discuss the fourth quarter and full year 2016 earnings. I'm Blake Holcomb, Director of Investor Relations.

Joining me on the call today are Douglas Stephens, President and Chief Executive Officer; Jeff Bird, Executive Vice President and Chief Financial Officer; and Kyle McClure, Senior Vice President of Finance, Treasurer and soon-to-be Interim CFO. We have posted a presentation on our website that we will refer to throughout this call.

If you'd like to view this presentation, please go to the Investors section of our website at franksinternational.com. Before we begin commenting on our 2016 results, there are a few legal items I'd like to begin to cover on page 3.

First, remarks and answers to questions by company representatives on today's call may refer to or contain forward-looking statements. Such remarks or answers are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such statements speak only as of today's date or, if different, as of the date specified. The company assumes no responsibility to update any forward-looking statements as of any future date.

The company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward-looking statements.

A more complete discussion of the risk is included in the company's SEC filings which may be accessed on the SEC's website, or on the website at franksinternational.com. You may also access both the fourth quarter and full year earnings press release and a replay of this call.

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 earnings release, which was issued earlier today by the company. I will now turn the call over to Douglas for his comments..

Thank you, Blake, and good morning to everyone on the call. I'd like to begin with a brief introduction to those on the call, I've not had the opportunity to meet yet during my little over three months at Frank's International.

So throughout my more than 25 years in oilfield services, I've had the opportunity to work in a variety of roles and with a diverse set of customers around the globe. And in many of these locations, I've had the opportunity to see Frank's deliver quality service to satisfied customers.

In fact, one of the reasons I was drawn to accept this position was this company, or the company's strong reputation for quality, technological expertise and of course our global extensive footprint.

Although the current environment has presented challenges we've not seen in decades, Frank's has not only proven its ability to endure, but to continue to set the standard for complex well construction. And I'm confident that we will not only weather this storm, but we will come out as a stronger, more efficient organization than we entered.

The first point I'd like to highlight is the successful acquisition of Blackhawk in Q4. This is a provider of specialty tools in the well construction space. And this is the largest acquisition in the history of our company. And our focus now is on the execution of this integration.

So despite a difficult 2016, we achieved two technical industry milestones for tubular running services. In September, Frank's International established a global record in casing while drilling operations.

Through modifying our existing technology and close collaboration with a large integrated service provider, we were able to complete the first 30-inch casing while drilling job, saving the customer more than a day of rig time. We also played a critical role in running the first ever casing string weight reduction module system.

The Frank's team safely and efficiently completed this job, helping the customer save money running one of the heaviest casing strings ever deployed, reducing the hook load by nearly 250,000 pounds. This allows the potential to run longer casing strings with lower rig specs.

It's these types of customized solutions and accomplishments that have led to our gaining the customers' trust and confidence as a premier well construction company and will serve us well as the cyclical recovery gains momentum.

In 2016, we were able to execute on our strategy to maintain our share in core markets and grow in underrepresented markets. While we saw another year of floating rig decline, we were able to maintain a greater than 50% share in the Gulf of Mexico and West Africa while holding share flat in Latin America.

Additionally, we expanded our market share in offshore and shelf markets, both domestically and abroad, particularly in the Middle East, where investments in drilling and completions continues at a strong pace.

We added diversification into specialty cementing and well intervention tools that broaden our well construction offering and provide a platform for growth beyond our core tubular running services, but we still have further to go. The offshore market remains under pressure and it's likely that more projects will conclude than begin in 2017.

However, we're beginning to see some green shoots appear. In addition to increasing our presence in the higher end works in the GCC countries in the Middle East, we are also seeing the European market begin to turn the corner.

New tenders are on the rise in Europe and we recently landed work in the Norwegian sector of the North Sea with a customer we had not previously served.

This demonstrates that despite the limited number of new opportunities, Frank's continue to be a trusted provider of well construction services with a strong balance sheet that can be relied upon throughout the cycle. Turning to page 5, I'll go through a few highlights and drivers of our fourth quarter results.

Overall, I'm pleased with our performance to end on a high note after a difficult year. Despite a 7% decline in core Frank's business, excluding Blackhawk, we saw a $5 million increase in adjusted EBITDA from previous quarter.

Every operating segment returned to positive adjusted EBITDA for the first time since Q4 2015, as lower costs and gains in underrepresented market internationally helped offset some of the declines in price and activity elsewhere. Also, bolstering the quarter was a 13% sequential increase in the U.S.

onshore revenue and return to profitability for the first time in two years. While we believe there is more growth to come in this market, we are encouraged by the positive effects of cost savings and price increases we've seen thus far.

We've opted to high grade, our customer base, and concede some market share in order to secure an overall 20% increase in price and enhance our focus on what we perceive to be the best basins in the Lower 48.

We expect to continue to see double-digit revenue increases throughout 2017 as rigs continue to be added and supply of services potentially begins to tighten.

In regards to controlling our costs, we achieved our goal of executing the previously announced $40 million in annualized cost reductions resulting in a 10% reduction in general and administrative costs quarter-over-quarter.

These cost actions put us on track to lower our annualized G&A expense more than 30% from 2015 levels and a step closer towards sustainable profitability.

We also lowered our capital expenses nearly 60% compared to the previous year, as we look to preserve our strong balance sheet and improve utilization of idle equipment while continuing to invest in the future.

Gains in Latin America, Canada and the Middle East drove revenue increases approaching 20%, but declines in other markets, particularly West Africa, led to a 10% overall decline in our offshore tubular services business. These ups and downs are likely to continue until we reach a bottom in offshore activity.

Capital budgets from our largest customer, it's a super-major, on average are again expected to be lower in 2017. Those with increased spending budgets are projected to prioritize offshore opportunities versus the onshore.

As a result, we anticipate further declines globally offshore with the prospect of reaching a bottom in activity sometime late in 2017, assuming the market fundamentals continue to improve.

Before we review our financial results in more detail, I'd like to take a moment to thank Jeff Bird for his hard work and many contributions to Frank's International the past two years.

He's played a pivotal role in the company's transition from a privately held to a publicly traded company and he has also been a great asset to me, personally, over the last few months as I stepped into this role. And I'd like to take this time to wish Jeff the best in the next stages of his career. Thank you, Jeff..

Thank you, Douglas. It's been privilege to play a part in helping Frank's make the transition from a private to public company. We've been able to accomplish a lot in a relatively short time, and I believe the company is well positioned for the future.

Since this is my last time on the earnings call, as a member of the management team, I would like to introduce Kyle McClure, who will be serving as Interim CFO, following my departure March 1. Kyle and I have worked together for the past four years at Frank's and our previous company.

As Senior Vice President of Finance and Treasurer, he served as a financial lead for the Western Hemisphere and we have worked closely together on many of the initiatives we have implemented during my tenure at Frank's. Douglas and I are confident he will make my transition out a smooth and seamless process.

Kyle?.

Thanks, Jeff. Turning to page 7, I will begin providing additional detail on changes in the global offshore mobile rig markets that we saw during the quarter. Overall market share was flat versus Q3 at 17% as we saw the addressable market decline by 12 rigs during the quarter.

Continuing themes from Q3, Latin America, Canada and Middle East were all bright spots during the quarter which we were able to grow our revenue and share. In the Middle East, specifically, we're finally gaining traction in the local market as we are now fully operational and saw revenues increase roughly 25% Q-on-Q.

West Africa saw a decline in share and revenue, as work pushes out or was canceled altogether. Mobile rig count is down by almost 50% in this region in 2016 and likely will continue to be challenged in the near-term time horizon.

In our largest market, the Gulf of Mexico, we saw revenues decline but share was higher as the average rig count remains relatively flat. Rigs and revenue in Europe fell in the quarter, but in line with our market share in the region.

Finally, Asia-Pacific saw declines in revenue and share as new work in the region was slower to start up than expected. Continuing on to the quarterly financial results on page 8. Given the nature of the current environment, we would look at Q4 revenue declines of the core Frank's business as mostly a price story.

As mentioned previously, offshore mobile rig count was down slightly during the quarter. And we did see many delays in Asia-Pacific and Europe. But pricing continues to be challenging in most regions, as we see a variety of pressures, from competition to customers looking to retender for lower prices, all having pressures on top-line revenue.

That being said, we were able to more than offset the pricing pressures with our continued focus on cost. We saw core Frank's revenues down 7%, while we saw adjusted EBITDA improve by $5 million sequentially.

So really a good story there, especially, if we think about the revenue declines from Q1 to Q3 this year, much better deleveraging in the quarter. The previously-announced Blackhawk acquisition which closed during Q4, added two months of revenue worth approximately $10 million and adjusted EBITDA of $1 million.

Additionally, the previously announced $40 million cost reduction was materially completed during the quarter and we are clearly starting to see the benefits. In adjusted EBITDA, I do want to call out that we had about $2 million of one-time good guys.

Turning to operating cash flow, we've got two items that I'll call out that we wouldn't normally consider operating or free cash. First, we had $13 million in cash severance associated with the ongoing reductions. And second, we had about $14 million in cash costs in the quarter relating to the Blackhawk deal that fall into operating cash.

So excluding those items, free cash was closer to negative $24 million, an improvement sequentially of about $5 million, as we had similar cash severance in Q3. We also exited the year with $320 million in cash on the balance sheet with no debt. In breaking down our business segments, we'll first look at International Services on page 9.

International Services revenue from external sales in the fourth quarter declined 10% sequentially to $46 million. Of the sequential decline, the majority can be attributed to a 30% decline in revenues in Europe and West Africa.

While Latin America, Canada and the Middle East collectively rose 18%, it was not enough to offset the declines in two of our historically larger international markets. West Africa and Europe revenue declined more than $7 million in Q4 due to deferrals, delays and the full quarter impact of previously canceled projects.

Conversely, revenues increased in the Middle East, Latin America and Canada where we are seeing more opportunities than risks at the moment.

Adjusted EBITDA for International Services in the fourth quarter was $1.5 million or 3% of external sales, down 63% sequentially as West Africa saw roughly $3 million in additional payroll tax expense and bad debt expense taken during the quarter.

Additional items of note during the quarter, we closed operations and have exited Peru and Western Canada. Moving to U.S. Services on page 10. The fourth quarter revenue from external sales decreased 4% sequentially to around $33 million. Adjusted EBITDA for U.S.

Services in the fourth quarter was $2 million or 6% of sales, up from a loss of nearly $6 million in Q3. U.S. offshore fourth quarter revenue was 9% lower sequentially to roughly $23 million.

Revenue was lower in the quarter, but decreased activities and volumes and some pricing impacts had certain customers continue to negotiate price discounts and competition for fewer rigs intensifies. For some competitors, it has become a fight for survival and leading to some unusually low bids on retenders. As previously mentioned, the U.S.

onshore business continued to pick up steam as our leaner cost structure is benefiting from increased activity and price increases in all markets we serve.

As a result, 75% of our locations are now positive on a gross margin and adjusted EBITDA basis with more improvements expected in 2017, even with some risk to market share from increased competition. Of note, we closed three additional U.S. onshore bases during the quarter as we continue to refine the cost structure. U.S.

Services adjusted EBITDA was $8 million higher quarter-over-quarter due to the sooner than expected impact of cost reductions and some one-time benefits from tax and payroll adjustments. As a reminder, this segment carries our corporate cost and other here in Houston.

This was roughly $12.4 million during the quarter, down roughly $3 million sequentially. Page 11 shows our Tubular Sales performance. Revenue in the fourth quarter was $19 million, down 3% sequentially. Adjusted EBITDA for Tubular Sales in the fourth quarter was $400,000 or 2% of sales, up from $200,000 in the third quarter.

As you are aware, our Tubular Sales business largely consists of large outside diameter pipe and connectors to customers in the Gulf of Mexico. Due to the steep decline in activity in the Gulf, we have correspondingly seen our Tubular Sales decline. We do, in some cases, deliver OD tubulars to customers in international markets.

They are less frequent and often difficult to predict when the customer will receive a shipment. On the whole, we expect this segment to continue to decline during 2017.

There are some increasing opportunities relating to gas storage and one-off international shipments, but with our backlog of orders at one-third of where we were a year ago, it is unlikely we will see meaningful improvement until the Gulf of Mexico ramps up. Lastly, a few comments on Q1 as we are approaching the final month of the quarter.

We would expect total company sequential revenues to be slightly lower. The global TRS business will likely fall by mid-single digits, driven primarily by lower U.S. offshore revenues as some customers opt to split work or solicit bids to keep competition fierce in the shrinking market.

Turning to adjusted EBITDA for Q1, the previously discussed cost reductions, which were largely completed at the end of Q3 and the beginning of Q4, therefore, we would say they are largely reflected in our Q4 results.

As with the one-time good guys we saw in Q4 and the loss of some higher margin work in the Gulf, we would expect adjusted EBITDA will likely fall at or below breakeven levels. I would now turn the call back over to Douglas for some final comments before we open the call to Q&A..

one, maintain our dominant position in our core TRS markets; two, grow in underrepresented markets on international, land, shelf, and deepwater; and three, become a more complete well construction company through a broader product and service offering. In 2017, our top priority will be to continue to execute on this strategy.

We will accomplish this first by providing safe and efficient operations to our customers. Second, we will increase our value proposition by bundling well construction offerings that are designed to meet our customers' needs.

We've identified the top 10 Frank's core technologies and another four from Blackhawk that we plan to commercialize throughout 2017. These offerings are the most complementary to serve customers facing challenging environments including depths, temperatures, pressures, and corrosive environments.

The combination of these well construction products will provide customers the convenience to benefit in more than one area of Frank's value proposition.

As safety, efficiency, and well integrity come into greater focus for the industry, the opportunity to save a customer time and money while increasing our share of the well construction spend represents a win-win scenario.

For example, a customer drilling in a challenging formation with a deviated well bore and corrosive gas can have a package offering that meets their well performance objectives.

Using the industry's only true non-marking casing running technology and installing our proprietary drill string torque reduction tool that prevents potentially hazardous casing abrasion during the drilling process, can improve the integrity and ultimately the life of the well.

Furthermore, adding the ability to manage the cement head and launch starts wirelessly without interrupting the cementing process and monitoring the progress remotely on our data visualization platform increases efficiency and improves safety by removing people from the well center.

We will continue to update our progress in commercializing these technologies in the coming quarters. Another key objective for us is to accelerate the Blackhawk revenue synergies. Although still early in the year, we're targeting a 15% to 20% increase in revenues year-over-year to roughly $80 million, which includes a doubling of the U.S.

onshore revenues. These increases will come from bringing the Blackhawk suite of products to select international markets, as well as through new and existing technology packaged offerings domestically. We are already experiencing success in combining the TRS and cement heads on land projects in West Texas.

And the positive feedback from customers gives us good reason to believe we will see this trend continue with customers in other regions. Overall, total company onshore revenue should increase more than 50% from 2016 levels.

As most current forecast expecting North America onshore E&P spend to increase 30% to 40% and with the rig count up to approximately 750, we view this as a reasonable and achievable target in the current market.

More importantly, we will achieve this growth profitably through honing our customer base, reducing our overhead costs, and raising pricing levels to sustainable levels, we can reach a revenue per rig approaching 2015 levels.

Finally, as we think about cash flow, it will require a combination of these objectives to accomplish our goal to become free cash flow positive excluding dividends by the second half of 2017.

Our current outlook on the market, barring unforeseen fundamental changes positively or negatively, is that offshore rig count is expected to fall on average another 10% during the year and newly tendered contracts will be reset at lower prices than in recent years.

In light of this, we will rely on making up the difference with gain in underrepresented markets and with up-selling and commercialization of new technologies. In summary, with the Blackhawk suite of products, continued improvements in the U.S.

onshore, lower costs, and new tender wins with technology-driven packages, we should see flat to modest improvements in revenue and EBITDA in 2017, even as pricing resets and activity finds a bottom.

While things could trend sideways for 2017 and market fundamentals remain largely out of our control, we have the tools necessary and the balance sheet strength to make Frank's a viable business for the remainder of this cycle, and a business equipped for long-term shareholder value as a recovery takes hold globally.

We will now open up the lines for questions..

Thank you. And we have our first question from Ian Macpherson with Simmons & Company. Please go ahead. Your line is open..

Hey, good morning. Thank you. Lot of moving parts with your U.S. Services margins, and I think that was the Q4 result, that was where the big positive surprise was, with your margin improvement. And I understand there were some one-off benefits, and I understand the guidance for Q1 to trend a little bit lower.

But it sounds like, in general, if my back of the envelope math is right, that your Gulf of Mexico margins probably stayed above 35%, maybe 40% for the fourth quarter, which is better than we had feared.

And I wonder if I could fact check that with you when you also just get the sense of your normalized margin expectations for the Gulf of Mexico business for 2017?.

Yeah, Ian, this is Kyle. So, yeah, you're spot on there with your analysis of the Gulf of Mexico margins within the quarter. A lot going on in U.S. Services.

Obviously we have our corporate and other component there as well, which we talked about was down $3 million sequentially, and of the net, sort of $2 million good guys I talked about, an abnormal amount were kind of sitting in U.S. Services, if you will.

So looking out into 2017, I think the Gulf of Mexico business will continue to be challenged as we continue to see more rigs come offline and impacting our rig count there. So it'll continue to be a struggle for us, I think to kind of maintain that 40% margin as we move through kind of Q1 and Q2 here.

We talked about it somewhat in the prepared commentary, but we do see some headwinds in Gulf of Mexico here in the first couple quarters of the year as there's competition out that's pretty fierce right now and things on the bidding side are getting a bit more challenging, I think than we had hoped. So I think the Gulf of Mexico and U.S.

Services margins will probably likely be challenged in the first half of 2017..

Okay. But then, given the improvements that are unfolding with onshore pricing, where would you say your margins, EBITDA margins for U.S.

land are today, and where could they be in the second half of the year?.

I don't know if we've historically given out the EBITDA margins for U.S. land. I would say they're probably right now in the 20% range as we exited the quarter. And we're looking at Q1 as potential uptick to that number as well. So I would say that business itself is getting healthier right now.

We've talked about the base closures and the price increases we talked about in the quarter, we raised prices across the board, I think roughly 20%, 25%. That was nicely received by our customer base. There's a lot of, obviously, the rig count increasing people are willing to pay-up for right now.

And we were losing money in that business and decided not to do that anymore. So we got the cost structure right. Got the pricing correct. I would say heading forward, we're looking for that business to be north of 20%..

Very helpful. All right. Thank you..

Thanks..

And thank you. And I'm sorry, speakers, it appears that we have no further questions at this time. I will now turn the call over to Mr. Douglas Stephens for closing remarks..

Okay. Thank you all for your time and your interest in Frank's International, and we hope to hear from you next quarter. Thank you..

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