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

Sean C. Meakim - JPMorgan Securities LLC Chase Mulvehill - Wolfe Research LLC Ian Macpherson - Simmons & Company International Bradley Philip Handler - Jefferies LLC Joseph D. Gibney - Capital One Securities, Inc..

Welcome to the Q2 2017 Frank's International NV Earnings Conference Call. My name is John, 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 the conference is being recorded. And now, I'll turn the call over to Blake Holcomb..

Thanks, John. Good morning, everyone, and welcome to the Frank's International conference call to discuss the second quarter 2017 earnings. I'm Blake Holcomb, Director of Investor Relations and Communications.

Joining me today on the call are Douglas Stephens, President and Chief Executive Officer; and Kyle McClure, Senior Vice President and Chief Financial Officer. We have posted a presentation on our website that we'll 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 Q2 2017 results, there are few legal items we'd like to cover beginning 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 these forward-looking statements.

A more complete discussion of these risks is included in the company's SEC filings, which may be accessed from the SEC's website or on our website at franksinternational.com. There, you may also access both the second quarter 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, any non-GAAP financial measures discussed in this call are defined and reconciled to the most directly comparable GAAP financial measure in the second quarter 2017 earnings release which was issued by the company earlier today. I will now turn the call over to Douglas for his comments..

continuing to lead in our key markets, growing in market where we've historically been under-represented, and becoming a broader well construction company. In Q2, our total company revenue grew 6% sequentially from strong performance in our International and Blackhawk segments.

The international improvements can be attributed to our efforts over the past 18 months to grow share and target markets where we've not had a large presence and where we have a competitive advantage in technology. Blackhawk continues to benefit from strong product sales in the growing U.S.

onshore market and from the introduction of new technology offshore, including well intervention rental. Included in this well intervention business is our line of storm packers for disconnecting drill string during weather emergencies on offshore wells.

In fact, we were present with these tools on five rigs during the tropical storm we had in the Gulf of Mexico in June. In the U.S. onshore market, our tubular running services grew 18% quarter-over-quarter.

Our growth in this business has slightly trailed the rig count in the past few quarters, where we're now trending closer towards keeping up with market growth. And we've conceded some share during the upturn, but are generating better margins and cash flow to increase pricing. We remain the leading provider of tubular services in the U.S.

onshore market and are maintaining adjusted EBITDA margins now above 20%. The pricing for services in the market is stabilizing at higher level, and we expect to begin gaining share with targeted customers in the coming quarters.

Further evidence of our growth and cost control efforts are reflected in the return to positive cash flow from operations and adjusted EBITDA in the second quarter for the first time since Q1 2016.

And at this point, I want to acknowledge both our operational and finance teams for working to reduce our days of sales outstanding to improve cash flow even as our business has shifted to markets that have tended to have longer-dated receivables.

We're encouraged by our ability to reduce our working capital requirements even while we grow our top line revenue. This will continue to be an area of focus for the remainder of the year as we drive to be free cash flow breakeven for the full year 2017.

The final highlight I want to point out is the recent win of six incremental rigs from our competition in the U.S. Gulf of Mexico. We have historically been a leader in this market, and maintaining the dominant position has been a key part of our strategy during this downturn.

So I want to congratulate our sales, engineering, and operational teams for their effort that led to winning this work and for their dedication in putting the needs and goals of our customers first.

The Gulf of Mexico is likely to continue to remain relatively flat in terms of rig count for the remainder of the year, but adding these rigs will position us for growth in this market in 2018. I would now like to turn the call over to Kyle. But before I do, I'd just like to say a few words.

So as you're aware from our announcement in June, Kyle McClure accepted the position to serve as our full-time CFO, and I want to commend the board for their decision and to congratulate Kyle for his appointment.

He's been a valued member of our management team and I'm really pleased that we'll have the opportunity to continue to work together with the employees, customers, and shareholders of Frank's International.

With that, I will turn the call over to Kyle to give some more detail on the second quarter results prior to giving my final comments on the rest of the year.

Kyle?.

Thanks, Douglas, and good morning to everyone. Before I get started, just a quick note. Any financial or market share comparisons in my prepared commentary will be for second quarter 2017 versus first quarter 2017. Turning to slide 7, I will discuss some of what we saw during the quarter in the offshore market.

Overall, market share was up slightly to 18% as we saw rig activity increased for the second consecutive quarter, primarily driven by jack-up rigs. Europe saw the largest increase in share during the quarter as work commenced on seven new rigs. Asia Pacific and the Middle East also saw gains in share and revenues.

Revenues in Africa were up over 10% as an improved business mix was realized in the quarter. Latin America and Canada saw small declines in revenue and share, and we successfully completed a couple of projects during the quarter.

However, we expect to pick up some work in Brazil later this year and continue to hold 100% of the offshore rigs in Eastern Canada. The U.S. Gulf of Mexico weakened again in the second quarter, as we expected.

This continues to be a challenging market in terms of pricing and activity but should begin to level out towards the end of the year and then we should see a pickup from the six rigs recently won. Turning to the quarterly financials on slide 8. Revenues for Q2 came in higher than we expected due to the acceleration of TRS growth internationally.

Q2 2017 represents the first time in 10 quarters that core revenues have grown sequentially. Globally, our core TRS business was up 7%, providing further indication that we are having success winning in a mixed market.

The International segment saw the most meaningful improvement as significant work scopes came online in the European market during the quarter. The Blackhawk segment also performed well as the U.S. onshore business continued to strengthen and some additional offshore rental work was realized. The U.S.

offshore and tubular segments face continued challenges from lower activity in the Gulf of Mexico. Adjusted EBITDA was up roughly $2 million, led by contributions from the International, U.S. onshore, and Blackhawk segments. Incremental margins were 30% in the quarter. This is slightly below where we'd like to be.

But as the business mix shifts, the lower-margin regions such as the Middle East and U.S. land and away from higher-margin regions such as the Gulf of Mexico, we will expect this to be the case. Second quarter cash flow from operations was $2 million, which was an $11 million improvement from Q1.

This can primarily be attributed to working capital improvements, specifically trade accounts receivable. We are making progress to improve our DSO particularly as more of our revenue is coming from some international markets that have longer terms.

Net CapEx for the quarter was around $3 million as we received about $500,000 in proceeds from the sale of assets. We expect that the CapEx likely to turn higher the remainder of the year as we allocate investment dollars to new equipment for work secured and complete the construction of our administration facility in Lafayette.

We also plan to see increased proceeds from the sale of other assets which will be additive to our free cash flow in 2017. We expect gross CapEx to be consistent with what we have previously mentioned at roughly $40 million.

We also ended the quarter with roughly $275 million in cash on the balance sheet, no debt, as well as access to our untapped $100 million credit facility. In breaking down our segments, we will first look at international services on slide 9. International services revenue in the second quarter increased 15% to nearly $54 million.

Excluding slight declines in Latin America and Canada, revenues rose 25%. The increase can be attributed primarily to Europe activity increases. Europe has been a good growth story for Frank's as we have seen increased rig utilization and the ramp-up of TRS and drilling tools work in the quarter that should continue throughout the year.

We also experienced double-digit revenue increases in Asia Pacific, the Middle East, and Africa. The changes quarter-to-quarter in the international regions have been a give and take, but the overall direction of the market continues to be positive in terms of increased activity levels and some uptick in tendering.

Adjusted EBITDA for international services in the second quarter was $9 million, an incremental margin of just above 50% as we saw good flow-through of deepwater TRS margins. Moving to U.S. services on slide 1, the second quarter revenue decreased 4% to around $30 million. The biggest driver of the decline was the U.S.

offshore revenues falling 16% to a little over $16 million. Revenue was lower in the quarter due to a reduction in activity and some resetting of pricing on legacy work. The U.S. land business again saw meaningful improvement, with revenues tracking overall rig count of roughly 20%. Adjusted EBITDA for U.S.

services in the second was a loss of $9 million. The decline in revenue and adjusted EBITDA can be attributed to lower activity and higher-margin offshore work in the Gulf of Mexico. As previously mentioned, our global support and corporate overhead costs sit in this segment which was flat at $25 million in the quarter.

Slide 11 shows our Tubular segment performance. Revenue in the second quarter was $16 million, down 5%. Adjusted EBITDA for Tubular sales in the second quarter was $0.8 million, down from $2.3 million as manufacturing expenses which are housed in this segment, rose by about $1 million.

The majority of our Tubular revenue generated in the Gulf of Mexico, as we have previously stated, remain soft. We are targeting some opportunities abroad that could improve results as they tend to be larger in size and scope, but more broadly we would expect this segment to decline further in the second half of the year.

Wrapping up the segments with Blackhawk on slide 12, total revenue for Blackhawk was $18 million, up 12%. U.S. onshore revenues continue to climb from record product sales in the Permian Basin despite a slight delay in the launch of our new frac plug, which is expected later this year.

We also saw improvement in the offshore well intervention rentals business. Additionally, we achieved our first major international synergy with the TRS business in offshore Mexico. Adjusted EBITDA increased by nearly $2 million as the business mix shift to some higher rental margins and lower costs were achieved.

Through the first eight months since the Blackhawk acquisition, we are making great progress. We are exceeding the targets from both our acquisition revenue and adjusted EBITDA for 2017 and believe we are on track to improve synergies internationally next year as the necessary certifications are obtained and international expansion accelerates.

To close out, I'd like to offer some comments on the second half outlook for 2017. Total company revenues are expected to increase 5% to 10% second half versus first half 2017. This growth will be driven by increases on our Blackhawk, International and U.S. onshore businesses.

We base this growth on our current visibility of upcoming projects and view that we will not see a material deterioration in the U.S. onshore market the remainder of the year. The additional rigs awarded in the Gulf of Mexico could offer upside above the higher end of this range depending on rig schedules. But for now, we expect the U.S.

offshore and tubular businesses to be lower in the second half of 2017. Looking at adjusted EBITDA, we would likely see incremental margins in the 25% to 30% range. Growth in the lower-margin onshore TRS businesses, combined with increased Blackhawk product sales, will offset some of the growth in the higher-margin International offshore businesses.

I will now turn the call back over to Douglas for some final comments before we open the call to Q&A..

Thank you, Kyle. And let me conclude our prepared comments on page 13 by emphasizing the key takeaways from the quarter and for the remainder of the year. So despite the offshore market remaining mostly flat to down, we expect to grow our top line revenues 5% to 10% in the second half versus the first half of 2017.

In a company where over 75% of our revenues come from offshore services and product sales, we see this as a very positive trend. It reflects our success in gaining share in international land and shelf, as well as targeted new geographies where we had previously been under-represented.

We're also expecting to see significant growth from our Blackhawk and our U.S. onshore business as we catch up to the rig activity over the past 12 months and drive pricing. The introduction and commercialization of new technology will also be a key factor to improving our incremental margin on top line growth.

Some of these technologies broaden our traditional service offering and provide the opportunity to increase our revenue per rig while improving customer efficiency, safety, and well integrity.

The other components of delivering better margins will be how we manage our costs through disciplined spending and the removal of indirect or unnecessary expenses. Some cost inflation comes with growth, but we are confident we can find ways to improve accountability within our organization and bring more to the bottom line.

Taking these steps, in combination with selling some non-essential assets through the remainder of the year, will allow us to achieve our breakeven cash flow target for 2017.

And as you know, we're fortunate to have a strong balance sheet that offers the flexibility to allow us to grow through a variety of paths, and we plan to maintain that optionality.

Enhancing our product and service portfolio with acquisitions such as Blackhawk give us the ability to grow revenue and profitability in a market that we do not expect to see meaningful improvements in the near to medium term.

The recent successes we have seen winning new businesses serves as a confirmation that our customers continue to value our services to meet their well construction needs. And I'm proud of our operational support teams that have maintained focus in doing their job safely and putting the customer first.

As the industry continues to find ways to make exploration development projects more productive and economic, Frank's reputation for quality and reliable services will position us to take advantage of new opportunities.

But until a full market recovery occurs, we will continue to find ways to grow our business through introduction of new technology and further expansion of our broader service offering across our global footprint.

Continued success in accomplishing these goals will allow us to produce attractive returns on capital and generate cash flow to create shareholder value over the longer term. We will now open up the line for your questions..

Thank you. We'll now begin the question-and-answer session. And our first question is from Sean Meakim from JPMorgan..

Thanks. Hey. Good morning..

Good morning, Sean..

So, I was hoping maybe we could start with a little more detail on the contract win. Could you give us maybe just a little more on the scope, timing. It sounds like maybe more of a 2018 event. Just trying to get a sense for the impact here.

And just thinking about given the challenges in that market, I imagine there's some cross – some different moving pieces here with respect to the margins and that's how your margin work. At the same time, it's a pretty challenging pricing environment. Just trying to get a sense of the impact on the U.S. business..

Yeah. So good morning, Sean. So, thanks for the question. So, yes, I think your analysis is correct is that – look, this is a customer that we have been working for some time. We've worked for them previously and we worked for them around the world, but not here in the Gulf of Mexico for over a year.

So, we're very happy with this, and I think our sales team has done a very good job. You are correct. There's pricing pressure in the Gulf of Mexico compared to where we were historically. But I can assure you, we can assure you that the variable margin for this work at the well site is still very good.

And with fixed rigs that's coming on-line, this gives us quite a bit of volume to absorb, particularly cost for our operational base in the Gulf of Mexico. And we expect to start this up in Q4. It's not going to be immediate.

I think the customers in the Gulf of Mexico are fairly sophisticated and they're very concerned about loss time, so they manage – the management change is quite sophisticated. So, we don't have all the rig charts yet, when we're going to be starting up.

We're anticipating starting the first rig in Q4 October-ish and then ramping up the remainder of the rigs through the remainder of this year and into 2018, which is why we haven't indicated a lot in terms of revenue in this year or primarily in 2018..

Thank you for that. And can you give me – maybe give us a little more with respect to – Kyle talked about the growth capital for this year. Is there any growth capital associated with these projects? It didn't sound like there is any increment over what you guided previously.

And also maybe just any mobilization costs or things that will run to the P&L in the second half?.

Yeah. So, for the CapEx – hey, Sean. It's Kyle – for the most part, we have all these equipment at the ready. As we think about sort of the 2018 sort of maintenance and growth CapEx, we're not quite there from a budget and process standpoint. But these particular rigs, we've got the assets in play at this point..

Okay. Fair enough. Thank you..

Our next question is from Chase Mulvehill from Wolfe Research..

Hey. Good morning..

Good morning, Chase..

Good morning, Chase..

Good morning. So, I guess I just want to come back to the guidance a little bit. The incremental guidance was second half versus first half, the 25% to 30%. A little bit lower than I probably would have thought, especially maybe it's probably targeted at the Gulf of Mexico.

So, maybe if you can kind of walk us through on the margin side, the pluses and minuses in the back half of the year. I'm assuming that International is probably better, offset by Gulf of Mexico.

So maybe if you can just kind of help us back into those numbers a little bit on the 25% to 30% incremental?.

Yes. So if you take a look at Gulf of Mexico which did $16 million in the quarter, we have that coming down by kind of 15% into Q3 and then kind of holding flat into Q4. So the decremental margins in Gulf of Mexico will come in at 100%. So, it's sort of a tough headwind.

It's worth dollar per dollar coming out, and we haven't really layered in the six rigs on our back-half forecasted. As we said, we don't have the sort of the schedule to kind of feel comfortable putting that out there in the public domain at this point in time.

So, the puts and takes on International, you're going to get nice incremental margins here sort of across the board. But as we look at the U.S. services segment, obviously, we've got our sort of global sort of organizational support and corporate overhead sitting there.

And then, you got the headwinds sort of as the Gulf of Mexico deleveraging happening in that space there. U.S. land will be a good story in the back half of the year as we continue to see that pick up nicely.

But when you're dealing with sort of 50% variable margins at the well site, those guys coming offline has a pretty big impact on us for the incremental headwind at this point in time..

Okay.

And on the International margin side, do you think that the back half of the year we could average 20% adjusted EBITDA margins?.

Yeah. I think that's a fair assumption for the back half of the year..

Okay. All right. Last one and I'll turn it back over.

How much of your International revenues are onshore versus offshore now?.

I would say they're predominantly offshore. We've got some onshore in the Middle East, but by and large it's offshore..

Okay. All righty. I'll turn it back over. Thanks..

Thanks..

The next question is from Ian Macpherson from Simmons..

Hey. Thank you.

Douglas, can you say what the average term duration is of the six new contracts in the Gulf of Mexico?.

Yes. These are long-term multi-year contracts that we've signed this for – I won't give you all the details, but this is not a well-by-well type of contract, right? This is a longer-term contract. And we anticipate having a very long-term relationship with this group, with this customer.

It's one of our best customers globally, so we anticipate this being longer..

When you sign multi-year contracts in this phase of the cycle, is the pricing fixed throughout the term or does it have variable mechanisms?.

There are typically variable mechanisms in the latter half of the contracts..

Okay. And then, also following up on Chase's question on the International side. Looking at the second half or even into 2018, how do you measure your progress with regard to underpenetrated markets? So I think specifically the international jack-up market.

Are you hitting your targets and do you still see significant runway ahead in terms of more market share penetration that you haven't gone to yet?.

Yeah. So there's a couple of things. So, of course, we're not chasing everything. We are going after specific markets, with these return targeted markets. And there's some countries in the GCC which are very attractive for us where, to some extent, the easy oil is behind them and they're really targeting or having a lot more complex wells.

And in certain countries in Asia as well where we haven't had a strong presence as we would've liked, and again there's only a few countries there where there's multi-rig, multi-year contracts available. I think we've done very well on gaining share and winning contracts. That side has gone quite well.

Where I think we need more progress is actually being able to ramp up and sell the technology and start generating real margin. So the contracts have been awarded, but we haven't been as quick in terms of generating the revenue and generating the margins as we would like..

Understood. Okay. Thank you..

Our next question is from Brad Handler from Jefferies..

Thanks. Good morning, guys..

Good morning, Brad..

I guess, a few different questions for me. I suppose we can start with the Gulf of Mexico in a couple of different ways.

But on the revenue side, perhaps – congratulations on the win, by the way – are there some contracts rolling off? Is there a net number that we should think about if we're to try think about your market share? Have you lost some bids? Or is that did you have to give up some work relative to positioning yourself to be ready to serve on the six rigs that are coming?.

So, Brad, there are still some contracts that are outstanding and, of course, there's always rigs coming off and on. But no, we certainly didn't have to give up anything to get this work we have, the infrastructure, the ability to do it. And there is no quid pro quo type of thing, if you give up this, we'll give you that.

So we certainly see this as a net gain right now. There are contracts obviously rolling on and rolling off. So there may be some wins and losses elsewhere, but certainly smaller in scope.

That's what we're anticipating right now compared to the space that there's not too many customers out there that actually have six rigs working for a multi-year program. So there's not too many opportunities to pick up this type of work. So I guess the net result is, we see a significant increase in our share in 2018..

Makes sense.

Actually, can you share your perception of your deepwater market share in 2018 once all the rigs have started in the Gulf of Mexico?.

No, I'd be a little bit reluctant actually to give you that number to tell you the truth..

Okay. All right. A follow-up or an unrelated follow-up, I guess. You made some references to profitability in the U.S. being impacted by property taxes and professional fees. Can you just give us a little bit more color around that, what the magnitude of those were and I don't know that those sound like they have to be onetime events.

So, maybe a little sense – is that something we can think about will continue to pop up or happen at a certain time of the year or again some more context around those, please..

Yes. This is Kyle. It's a good question. If you look at our U.S. services segment kind of where we sort of pile all of our organizational global support and kind of corporate overhead business buckets. So, we have sort of a lot of cats and dogs sort of piled into the segment here.

So as we have a one-off expense flow-through in the company really impact this segment from quarter-to-quarter, I wouldn't anticipate sort of the property taxes, or professional services either – we sort of joke around here a little bit which is sort of the loss, small number that we are in right now that if you have a $1 million unanticipated, unaccrued for expense come through in the quarter, it really kind of throws that segment out of kilter.

And so, that's what we're sort of calling out there, is that we have a one-off property tax that we didn't anticipate coming in, in the quarter or professional services fee that we didn't anticipate as well. It's all sort of housed in this bucket.

So, we wanted to sort of make sure people are aware that this segment has some sort of underlying cost volatility to it..

Understood.

But to be clear, I guess, the guidance you're giving with respect to, say, decremental margins or what have you, you're not stripping out anything to arrive at a clean number as a base that's including these charges, right?.

Yes. We're not stripping – it's included..

Okay. Okay. Got it..

Yeah..

I guess just one last one for me, please. I know these things can be very, very difficult to try to anticipate, but you have had recurring expenses related to the investigation that you obviously had to call out.

Any feel for how long that – from a charges standpoint, I can understand resolution can be very difficult, but at some point maybe the investigation, the spending part is done.

Any feel for when that kind of wraps up?.

Not this time, I think we're still obviously – we made the announcement last year. On this day, we still have some tail on this from just the underlying investigation cost. Obviously, we'll call it out in the reconciliation to adjusted-EBITDA, but no real time to provide any kind of – on the tail for that spend..

Not long enough. Okay. Got it. Thanks for the answers, guys..

Okay..

Thank you..

And our next question is from Joe Gibney from Capital One..

Thanks. Good morning. Douglas, just a question on Blackhawk as we think about this into the back half of the year, in particular on the equipment certification process. I know sort of dovetailing into other markets and getting a little bit more synergies sort of predicated on a little bit of that lag.

But could you kind of update us there sort of timeframe of maybe when you might see a little bit more traction in other markets like, say, North Sea that you've been targeting? Is this for first half of 2018 we start to get a little more traction there? Just help us a little bit there in terms of timing..

Yeah. Thank you, Joe. Very good question. No, you're correct. In actual fact, when the acquisition was done, it was anticipated that some of these rental tools would take a bit of time for certification in other markets and it's panning out as planned. So outside of the U.S.

we're actually seeing pretty good results, very good results in Mexico thus far in some of the activities going on offshore there.

The next places will be further east across the Atlantic, and it would be in Q4 and into Q1 when we really start seeing revenue upticks there and through 2018 when we start seeing meaningful growth in the equipment rentals for Blackhawk, as you've said, as we get the various certification requirements completed..

Okay. That's helpful. And Kyle, just a question for you again, circling back to the issue on global support and corporate overhead, just trying to understand. So I think last quarter was like a $20 million sort of guidance and that was up obviously with some moving parts and some shifting with some G&A you guys alluded to.

But it also included, I believe, some one time on medical that boosted that number more to like $20 million.

So, is going forward sort of a $20 million to $25 million range what you're kind of indicating, or is this – we got the good guys and bad guys in the quarter that kind of impacted that to get to the $25 million number? So just trying to understand, you said flat $25 million, but I thought it was lower last quarter in 1Q..

Yes. So, I think if you're going to sort of think about the rest of the year, I think we would probably think that $25 million number as more likely to kind of be a run rate here in the near term. We obviously look at sort of opportunities around that cost structure here internally and what opportunities we might have there.

But likely for the back half of the year, we should probably be thinking sort of closer to that $25 million number for Q3 and Q4..

Okay. Appreciate it. Thanks..

And I'm showing no further questions in the queue..

Okay. So, I just want to take this opportunity to thank everyone who's involved in the call, taking the time and thank you for your participation, your interest in Frank's International..

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating and you may now disconnect..