Blake Holcomb - Frank's International NV Michael C. Kearney - Frank's International NV Kyle F. McClure - Frank's International NV Scott A. McCurdy - Frank's International NV Steve Russell - Frank's International NV.

Ian Macpherson - Simmons Energy Brad Handler - Jefferies LLC.

Welcome to the Q3 2018 Frank's International N.V. 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. And please note the conference is being recorded. I will now turn the call over to Blake Holcomb..

Thanks, John. Good morning, everyone, and welcome to the Frank's International conference call to discuss the third quarter 2018 earnings. I'm Blake Holcomb, Director of Finance and Investor Relations.

For today's call, we have pre-recorded prepared comments from Mike Kearney, Chairman, President and Chief Executive Officer; and Kyle McClure, Senior Vice President and Chief Financial Officer. Mike will not be joining us for the Q&A portion of today's call, as his wife had surgery yesterday and he's understandably wanting to be there with her today.

Joining Kyle for the Q&A portion of today's call will be Steve Russell, President of Tubular Running Services, and Scott McCurdy, President of Blackhawk Specialty Tools. A presentation has been posted on our website that we will refer to throughout this call.

If you like to view this presentation, please go to the Investors section of our website at franksinternational.com. Before we begin commenting on our third quarter 2018 results, there are a few legal items we would like to cover beginning on slide 2.

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 as different as of the date specified. The company assumes no responsibility to update any forward-looking statements as of any future date.

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

A more complete discussion of these risks is included in the company's SEC filings which may be accessed on the SEC's website or on our website at franksinternational.com. There, you may also access both the third quarter 2018 earnings press release and a replay of this call.

Frank's International uses its website as a channel for distribution of material company information. Such information is routinely posted and accessible in the Investor Relations section.

Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in the third quarter 2018 earnings release, which was issued by the company earlier today. We will now play Mike and Kyle's pre-recorded commentary and then move to Q&A..

core countries, flex countries, and inactive locations. Through the third quarter, our efforts to exit inactive locations are well advanced, and we expect to complete this process by the end of the first quarter of 2019. Our near-term focus is to capture high value opportunities in our core and flex countries.

As we have said in the past, the best outcome is for Frank's to have our proprietary technology specced into a tender. The bottom line for our TRS optimization initiative is to ensure that we focus on the right opportunities in the right locations and leverage our people, technologies and portfolio to drive sustained profitability.

We've been very successful in the development of new or enhanced technologies to solve customer issues. A clear example of our differentiation is the rapid market acceptance we have seen for our VERSAFLO tool.

Our entire fleet is currently fully deployed, and we're expanding capacity as quickly as possible to meet increasing customer demand for this tool. Our second near-term priority is the international expansion of Blackhawk with a focus on high value markets.

We've made significant progress in driving customer awareness and adoption of Blackhawk's middle and product (06:56) offerings since acquiring this business in late 2016. For the first nine months of 2018, we experienced an approximate doubling of international revenue compared with the same period last year.

Contributing to this growth was Blackhawk's expansion into more than a dozen new countries, including Australia, Canada, Cyprus, Gabon, Guyana, Israel and Trinidad, to name a few.

Blackhawk customers are coming to appreciate the benefits of technologies that improve their well construction operations, solve their well intervention challenges and increase the overall safety of their operations. An example of Blackhawk's success with new proprietary technologies is SKYHOOK, which was first offered to customers earlier this year.

As a reminder, SKYHOOK allows operators to make up their cementing iron or hose without the need to send rig personnel above the rig floor. The adoption of SKYHOOK has been fantastic, including being used on 95% of Blackhawk cement jobs in the Gulf of Mexico during the third quarter.

To meet growing demand, we continue to roll out newly-certified tools. We also have dedicated resources specifically targeted to completion of additional tool certifications to meet the most stringent customer and market requirements.

We believe this puts Blackhawk in a great position going into 2019 to capture additional market share and expand into countries not previously served. The final near-term priority is cost reduction and improved profitability.

I'm pleased to report that we expect to meet our targeted goals including a 2018 exit rate 300-basis-point improvement in gross margin versus 2017 and G&A reductions of 10% from 2017 levels.

The combination of accomplishing these two goals will result in approximately $30 million of operating margin improvement on a run rate basis as we move into next year. Kyle will provide more detail in his comments.

Finally, while we're still developing our detailed budget for 2019, I would like to spend a few moments providing some initial thoughts on our outlook. We continue to see positive leading indicators that support our expectation of a sustained but gradual overall market recovery.

Importantly, we are seeing increased tendering activities in the offshore and international markets where we have an established operating footprint. Supported by continued high demand for our offerings, we have an enhanced line of sight for the coming year and fully expect to see significant year-over-year financial improvement in 2019.

Of course, trying to forecast the trajectory of the recovery is difficult and we do anticipate some choppiness. Regardless of how it plays out, we believe we're in a better position to capture additional market share and prudently increase pricing in an environment of increasing customer activity.

We believe the successful execution of our strategic priorities will result in additional new technology solutions for our customers and reduce cost to more fully leverage the earnings power of our business.

Having said that, there is always more we can do to drive further enhancements in efficiencies, and we are aggressively pursuing multiple initiatives across the business to drive further improvements. I look forward to keeping you apprised of our progress over the coming quarters.

With that, I'll now turn the call over to Kyle to provide additional details on the financial and operational results during the quarter.

Kyle?.

Thanks, Mike. Let's go ahead and jump into segment results on slide 6, starting first with our International Services segment. International Services revenue in the third quarter was down roughly $5 million or 9% sequentially to approximately $54 million.

The decrease can be attributed to revenue slowdowns in Latin America, Canada and Africa as services on a number of projects completed during the quarter. Partially offsetting the sequential revenue decline was the commencement of new projects, primarily in Europe.

Adjusted EBITDA for International Services in the third quarter was $7.8 million, down roughly $6 million from the second quarter. Adjusted EBITDA was impacted by the previously announced completion of projects during the second quarter. In general, the International segment performed about how we expected in the quarter.

I would add, however, that this segment will likely be back closer to Q2 levels in the fourth quarter as new work on in Europe and Africa will materialize; as well, I would offer that international offshore markets heading into 2019 are poised for a nice recovery, specifically in Africa, Europe and South America.

We continue to see tendering activity build to a level we have not seen in many years in each geographies. Turning to U.S. Services on slide 7. Third quarter revenue increased 9% to just over $38 million. Third quarter U.S. offshore revenue exceeded our expectations, up roughly 9% sequentially.

The growth was due to market share gains and a move to a more completions-based work in the Gulf of Mexico. The U.S. onshore business also grew revenue during the quarter, rising a little more than 9% due to increased activity and improved pricing. This marks the ninth consecutive quarter the U.S. onshore business saw growth. Adjusted EBITDA for U.S.

Services in the third quarter was a loss of $0.8 million, an improvement of nearly $6 million sequentially. The improvement quarter-over-quarter is attributed to an improved mix of offshore business, better pricing on U.S. land and lower G&A cost in this segment. Turning to slide 8, we'll take a look at our Blackhawk segment results.

Total revenue for Blackhawk was $23.9 million, up slightly from Q2. Sequential revenue was higher primarily due to an increased U.S. onshore services and product sales, and increased well intervention activity in the Gulf of Mexico as a result of storm season.

Adjusted EBITDA in this segment was $4.3 million in the quarter, or 18.1% of revenue, up 240 basis points versus Q2. This is largely due to increased contribution from offshore well intervention products and services mix. Wrapping up the segments with Tubular Sales on slide 9. Revenue in the third quarter was $12.9 million, down almost 8% sequentially.

Adjusted EBITDA for Tubular Sales in the third quarter was $300,000, up from $200,000 in the second quarter. Revenues were lower sequentially due to changes in customer drilling schedules. We do expect that delayed orders in previous quarters will be delivered in Q4, which I will touch on in our Q4 guidance.

Turning to slide 10, we will summarize the quarterly financial results. On a company-wide basis, revenues were down 2% sequentially. Global TRS was down 2% as the expected slowdown in the International segment was offset slightly by market share gains in the Gulf of Mexico and continued activity in U.S. land.

Even against the backdrop of declining revenue, adjusted EBITDA expanded 70 basis points sequentially, generating slightly higher adjusted EBITDA in the quarter driven by reduced G&A and better mix within the International and U.S. Services segments.

Third quarter cash flow from operations was positive $2.5 million with a slight improvement in cash and short-term investments ending at $247 million. As well called out in this morning's press release, we closed yesterday on a five-year $100 million revolving credit facility.

This new facility, in addition to our cash balance, should give us solid footing around our financial flexibility and we continue to maintain one of the strongest balance sheet in the industry. As Mike mentioned in his previous comments, we are on track to achieve a couple of stated financial targets we rolled out in February of this year.

First, we stated a gross margin improvement of 300 basis points over the course of 2018.

So far, year-to-date versus 2017, we are well-advanced and believe with the mix of business internationally, continued targeted price increases, and final actions around our country rationalization program, we will enter 2019 on a gross margin run rate that we have been targeting.

Second, we targeted a G&A reduction of 10% from 2017 levels over the course of the year. So far, year-to-date versus 2017, we are down 7% and expect to achieve a run rate 10% reduction by the time we enter Q1 2019. Additionally, G&A is down as a percent of revenue 620 basis points through nine months versus 2017.

So even as sales have increased 12% year-to-date versus 2017, we have been driving cost out and controlling any incremental needs to fund the business. To close out (15:41) I will provide some color on what we expect to see in the fourth quarter and a first look at 2019.

Looking at Q4, we expect to see total company revenues increased 5% to 10% from the third quarter. The International segment is expected to see activity return closer to what we saw in Q2 with the pickup of work scopes in Europe and Africa. The U.S. Services segment revenues will likely be flat as we would expect U.S.

land to slow its growth rate with the broader market slowing and no real change is expected in market share and activity in the Gulf of Mexico. We would expect to see the Blackhawk segment revenues flat to Q3 with a slight slowdown in their Gulf of Mexico and International businesses, offset by continued strong product sales in U.S. land.

The Tubular segment should see substantial growth sequentially as the number of larger orders that have been in the pipeline will ship and we should see this segment up at a minimum 30% sequentially, potentially more depending on the timing of various orders.

For the full year 2018, we are increasing our revenue and adjusted EBITDA guidance to reflect Q3 results and our projections for Q4. Our current thinking for full year 2018 is that revenues will be between $510 million and $520 million, and adjusted EBITDA will be in the $32 million to $37 million range.

As we turn the page on 2018 and start taking a look at 2019, I wanted to give you our thoughts on what we believe will be a gradual step-up in revenues and adjusted EBITDA throughout the course of 2019. Looking at revenues, we would expect to see a base case of 15% growth across the business.

We expect to see strong growth driven by the International Services segment with growth expected from all regions in the range of 10% to 20%. The Blackhawk segment will continue to see significant growth internationally and in the U.S. land market as they commercialize and introduce new products.

Tubular segment as well should see robust growth as coating activity has increased and customer sentiment has improved. We expect to see the U.S. Services segment up slightly, but not to the extent as the other businesses as we expect U.S.

land to be up provided we don't see additional bottlenecks and don't expect to see the Gulf of Mexico materially improve versus 2018. From a profitability perspective, we would expect to see incremental margins on the revenue growth to be in the 30% to 50% range depending on the mix.

The timing of growth will be gradual throughout the year with likely Q1 2019 being down from Q4 2018 and then working up from there. Obviously, we are not a backlog business, and this is all subject to our customers and their plans materializing, specifically on the international project side of the house.

But we feel like we are in excellent position to take advantage of what we see as a better international and offshore market in 2019. With that, we'll open the call to Q&A..

Thank you. We'll now begin the question-and-answer session. And we do have a question from Ian Macpherson from Simmons..

Hey. Thanks. Good morning, everyone. I wanted to ask on Blackhawk. It seems like the international growth story there is clicking very well.

How much of your first nine month's revenues in Blackhawk this year are now from international?.

Sure. I'd say – how much are now from international, I'd say, this quarter, we're looking at kind of a low 20%. That's gone up over the course of the year. On average, probably 17-ish percent for the nine months..

Got it. Okay.

And so I assume you're still projecting outsized growth for Blackhawk internationally compared to North America for 2019 as well?.

I would say for 2019, I would say as a percentage, we certainly see the highest growth coming from international markets. I think Gulf of Mexico we see relatively flattish, and then we see some pretty sizable growth still from U.S. land as well..

Got it. Thank you. Then I just wanted to ask about the revolver. Obviously, you've got plenty of cash in the balance sheet already.

So maybe you can talk about your intentions or aspirations for that expanded liquidity and what types of things you might have in your crosshairs in terms of expanding the technology portfolio?.

Yeah, sure. So, I think we're obviously always in the market screening deals to see what's out there. I think putting the revolver in place we had one expire in August of this year. It's just a good practice financially for us. We've still got $215 million (20:36) on the balance sheet.

But feel like just having that out there to give us some financial flexibility as, obviously, we're screening through various deals from time to time just to make sure we're not having to put that in place the last second, just the additional flexibility for us..

Okay. Understood. Well, look, good results and outlook. Congrats there and, Mike, best to you and the wife in recovery. Thanks..

Thanks, Ian..

And we have a question from Brad Handler from Jefferies..

Thanks. Good morning, guys..

Good morning, Brad..

If you could please just speak to the third quarter results in U.S. Services, maybe get another layer in. It was a very impressive profit improvement. It sounds like it's a little bit of kind of all the boxes being checked.

But if you could help us out a little bit perhaps just how much was G&A improvement perhaps, so we could start to think about kind of the ongoing incremental margins, which still seem like they were very strong..

Right. So, this is Kyle. I'll take the first part of this question. I'll let Steve kind of fill in some of the color commentary that's going on in the market. I think from a top line standpoint, we obviously saw the mix in the Gulf of Mexico have a nice tailwind in the quarter, and got on a couple of new rigs and more of a completions-based work.

(21:59) incremental margin flow through. The other half of the coin here is really on the G&A side.

The segment absorbs the large majority of our, call it, $37.5 million in the quarter, G&A fits in this particular segment, and that was down substantially in the quarter as well as our cost-reduction initiatives continue to work their way through the P&L. And I'll let Steve kind of take you through some of the color commentary on U.S.

land, as well as Gulf of Mexico..

Yeah. Good morning, Brad. So I think on U.S. land, we've had some market share gains over the last few quarters, and I'd also seen some pricing leverage in the market. Now, going forward, I'm always nervous to give guidance on U.S. land in Q4 with the holiday periods and the weather and whatnot.

But we're still seeing robust demand for our services in the underlying market. I think in the Gulf, again, we've seen some market share gains during Q2 and Q3, and they're pretty robust from a contractual perspective. To reiterate Scott's comments earlier, I would say the Gulf is looking sort of flattish activity year-on-year.

So I'd think we'll be more in a sort of a hold and sustain mode in the Gulf rather than continue growth going forward..

Okay. Fair enough. And I appreciate the extra color. But if I dig into both of those ideas a little bit, I guess we have certainly seen in other companies as well other businesses there can be a mix shift quarter-to-quarter in terms of what the rigs are focusing on in the aggregate.

But would you have us think that this was perhaps an exceptionally favorable quarter skewed to the completion side and therefore there is risk at just the underlying activity in the Gulf of Mexico? You're on the same rigs but the underlying activity quarter-to-quarter can shift pretty meaningfully, and we've done like double-digit percentage kind of ships up and down, or is that much more muted than that when we're talking about hold?.

Yeah, Brad. I mean, there is some movement within the Gulf depending on whether the rigs are in completion or drilling mode. I wouldn't characterize it as double digit, so less than that generally..

Okay. All right. That's helpful. And can we assume that – you're not suggesting there is – some of the pricing gains you've had, if I shift to the U.S.

land side, some of the pricing gains you've had, is there any reason to think that that falls under pressure or that gets challenged as maybe competition tries to sort of claw back share or any concerns you might have in terms of holding the pricing gains you've been able to realize here recently?.

Well, in the short term, we're not seeing huge pressure on that. Obviously, we're watching particular basins and specifically the Permian activity levels going forward and we will adjust accordingly. But right now, we're not seeing that pressure at this point..

Okay. That's helpful. And then I just want to make sure on the G&A progress, I heard your comments correctly. Sometimes you type away and you don't always hear everything.

There's more progress to be made, you think, by the exit of the fourth quarter, right, so we might, all else equal, expect to see some continued improvement in the – what is – are in for G&A line in the fourth quarter and then on into 2019, correct?.

Yeah. That's the expectation here internally. We've gone through a number of efforts internally throughout the year to kind of contain that cost either just sort of being from an attrition standpoint, reduction standpoint. We're now at a point where it's no longer that we're doing reductions.

It's more of a sort of concerted effort to control that cost, either through folks leave the company. We're not going to backfill positions in certain cases and we've got I think a pretty good handle on at this point, whether it be professional services or headcounts.

So, I think that would continue to be going down from this point would be our expectation..

Okay, very good. All right. Well, I've asked my more than my fair share. I'll turn it back, but thanks for the answers..

Thank you. And I have no further questions..

Okay. Well, it looks like that concludes the Q&A portion of today's call. Thanks everyone for joining. Have a great rest of your day and get out and vote. Take care..

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