FTS International, Inc. (FTSI) on Q2 2021 Results - Earnings Call Transcript
Operator: Thank you, and good morning, everyone. As a reminder this conference is being recorded for replay purposed. Participating in today’s call will be Gene Davis, Chairman; Mike Doss, Chief Executive Officer; Buddy Petersen, Chief Operating Officer and Lance Turner, Chief Financial Officer. Before we begin, I would like to remind everyone that comments made on today's call that include management's plans, intentions, beliefs, expectations, anticipations or predictions for the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those expressed in any forward-looking statements. These risks and uncertainties are discussed in the Company's annual report on Form 10-K and in other reports the Company files with the SEC. Except as required by law, the Company does not undertake any obligation to publicly update or revise any forward-looking statements. The Company's SEC filings may be obtained by contacting the Company and are available on the Company's website, ftsi.com, and on the SEC's website, sec.gov. This conference call also includes discussions of non-GAAP financial measures. Our earnings release includes further information about these non-GAAP financial measures, as well as reconciliations of these non-GAAP measures to their most directly comparable GAAP measure. We do not provide forward-looking reconciliations or forward-looking non-GAAP measures. It is the timing and nature of excluded items are unreasonably difficult to fully and accurately estimate. I'll now turn the call over to Gene Davis FTSI’s Chairman. Gene?
Gene Davis: Thank you, Michael. Good morning, and welcome to FTSI’s conference call for the second quarter of 2021. We are pleased that you can join us today. This morning I will turn the call over to Mike Doss to review the financial results of the second quarter and discuss our major operational initiatives. I'll then make a few comments and turn the call over to questions. Mike?
Mike Doss: Thanks Gene. Starting with our financials, revenue was $99.8 million in the first quarter up from $95.9 million in the first quarter – $99.8 million in the second quarter, I meant. Adjusted EBITDA was $13.8 million, up 77% sequentially. The higher revenue was the net impact of three items. Each of which had a similar impact in terms of magnitude. First, we had an approximate 7% increase in pricing; second, total pumping hours increased by 5%; next, partially offsetting these two items there was a decrease in the amount of materials that we provided to our customers. Materials and freight costs, as a percent of revenue, was 11% in the second quarter, compared to 20% in the first quarter. This had no material impact on gross profit. As we've discussed on previous calls, our focus is on maximizing gross profit, which is our top profit, which is revenue less the costs of materials and freight, not gross revenue. Most of our customers have sophisticated supply chain capabilities and prefer to arrange for their own materials. This works for us because there is essentially no margin in commodity products and we avoid the working capital carry. To give a sense of magnitude if we provided materials, including sand, chemicals and fuel to all of our customers on all stages, our revenue would have been $150 million to $200 million higher. Our operating expenses also would have been $150 million to $200 million higher. We had 13 active fleets in the second quarter and 11.8 fully utilized fleets unchanged from the first quarter. While utilization held just over 90%, pumping hours per day increased by 7%. SG&A was $12.5 million in the second quarter, including $1.7 million of stock based compensation. This compares to $10.5 million in the first quarter, including $0.9 million of stock-based comp. The increase was primarily driven by compensation with the restoration of salaries that were reduced in 2020 due to the pandemic and higher stock-based comp related to the investing of certain performance-based awards that were granted in 2020 CapEx was $7.5 million in the first quarter, compared to $5.3 million in the first quarter. I believe I said first quarter CapEx was $7.5 million and the second quarter. Our CapEx, which is all maintenance related year-to-date, continues to benefit from our in-house maintenance capabilities and digital innovations. These allow us to deliver a maintenance CapEx level of $2.5 million per active fleet over time, which we believe is one of if not the most cost-effective in the industry time. Time and again, we have proven the durability and sustainability of our equipment as our operating efficiency has continually improved all while pumping in some of the most demanding environments. To put this in perspective, our frac units are now pumping 150% more hours per year than seven years ago. We ended the quarter with $99 million of cash and $32 million of availability under our revolving credit facility, f total liquidity of $131 million. Cash provided by operating activities was $20 million in the second quarter, which included a $6.7 million release of working capital primarily due to better than expected collections. In the first quarter, we had a $22 million increase in working capital resulting in a working capital increase net year-to-date of $15 million. We're happy to be back in cash generation mode after a severely depressed, 2020 and the completion of our restructuring in November of last year. Turning to the outlook, we currently expect adjusted EBITDA to be between $14 million and $17 million in the third quarter. Fleet utilization is expected to be comparable to the second quarter, but pricing is improving incrementally in the mid-single digits. Our operations calendar has been quite uneven in recent months, April and May were high utilization, whereas June had more white space. The third, the quarter is expected to be essentially a mirror image of the second quarter. We've had just about as much white space in July as we had in June, but our customer is now essentially full this month and next month. We think this is the result of our customers managing to thier second quarter CapEx budgets. As for the rest of the year, we're starting to gain greater visibility into the fourth quarter, but we are not yet in a position to provide specific guidance. However, we remain confident about exceeding $50 million of adjusted EBITDA for the year. SG&A is expected to be in the range of $45 million to $50 million for the year, including approximately $4 million of stock-based compensation. Maintenance CapEx is expected to be between $30 million and $35 million for the full year. Total CapEx is expected to be between $45 million and $50 million, including growth CapEx associated with the construction of a new fleet that I will talk about next? As you may know, there has been a lot of discussion in the industry about lower emissions equipment in recent times. And the market is beginning to become segmented by equipment type. We have been a leader in dual-fuel for years, and we currently have seven dual fuel capable fleets out in the field. We can cost-effectively provide additional dual fuel units to customers upon requests. Note that these fleets have Tier 2 engines that are outfitted with an aftermarket conversion kit. With the kit, those engines can displace about 50% of diesel fuel with natural gas at optimal conditions. However, this displacement rate can be improved with newer technology. An ideal solution that we believe makes sense economically and in terms of performance utilizes Cat's Tier 4 Dynamic Gas Blending, or DGB engines. These engines offer an expected displacement rate of about 75% at optimal conditions. Maximum displacement is rated at 85%. They also have a much better emissions profile than Tier 2 dual fuel engines. Cat's Tier 4 DGB engine is supported by a mature supply chain and third-party expertise, fits well with our in-house maintenance program and seamlessly integrates with our proprietary fleet automation systems. With that, I'm pleased to announce that we have reached an agreement with a large independent E&P company to build a new fleet outfitted with these engines. We will assemble this fleet in-house, and it will be ready for deployment in January. The agreement offers pricing and utilization levels that will allow us to recoup over 2/3 of our capital investment over an initial term of 18 months. The total outlay is expected to be approximately $26 million, half of which will be paid in cash this year and the remaining amount in 2022, which will match up against cash generated by the fleet. We also believe that electric fleets have potential, but the technology and business model is evolving quickly. We closely monitor developments and assess customer appetite for these fleets, but it still feels early and we're not yet convinced that the benefits exceed the costs. Another trend frequently being discussed is for the frac company to just provide electric pumps and not the power generation assets. Those could be owned or contracted for by the operator. While this would lower the capital investment for the frac company, the capital for the power generation would still need to be provided by another party or the E&P company itself. When it comes to electric fleets, comes to electric fleets, we think it's important to consider a couple of additional points. First, a different source of mechanical power for the pumps does not improve the quality of stages or operating efficiencies such as pumping hours per day. This is unlike to move to more capable drilling rigs some years ago. Next, emission from completions activity, although they are more visible, represent a relatively small portion of an E&P company's total emissions. There are many other ways for an E&P company to achieve greater emissions reductions per dollar spent. We think that both of these considerations ultimately will limit broad customer adoption, at least for the foreseeable future because of the required premium and pricing to justify the investments made by service companies. Despite this, as eFleet technology improves and as economics allow, we expect that over time, conventional fleets will be increasingly displaced. We likely will be a participant with a close eye on emissions and cost per lateral foot outcomes for our customers as well as actual financial results for our shareholders. We may also test different configurations, particularly those that aim to improve pump design to assess performance. Another comment that we often hear in the industry is that existing frac equipment in the field is old and will need to be replaced with newer technology in the coming years. There is nothing about our equipment performance and conditions that would support that sentiment. With our modular units, in-house maintenance, advanced analytics and automation, we work to ensure that all of our equipment, regardless of the original manufacturer data of the chassis can match the performance of the newest piece of equipment. We expect the same capabilities, efficiency and operating metrics out of all of our fleets as does the customer. I'd now like to talk about the status of our unique digital innovations that are making a big difference on location where it counts. As discussed on our last call, earlier this year, we announced the successful launch of our fully automated equipment health monitoring and control technology. This technology integrates MachineIQ, or MIQ, with our in-house frac software and pump control along with other support systems. This technology has now been rolled out to all of our active fleets. As a reminder, this technology predicts and automatically reacts to pending equipment failures in real time, resulting in a consistent velocity that provides the best opportunity to complete stages as designed. It does this by essentially eliminating mid-stage rate disruptions often caused by common fluid end failures such as cut valves and seats and blown packing. These instances account for over 60% of pump failures during the stage failures during the stage. The system also assesses in response to other faults, such as pending engine and power end failures. MIQ is a real-time equipment health monitoring algorithm. When components are nearing failure, the system will neutralize the applicable pump and rebalance the rate with the healthiest pumps in the system, all within a millisecond. To our knowledge, we are the only frac company with automation technology this advanced. This technology also improves maintenance outcomes for our equipment by mitigating costly failures and improving safety for our frontline men and women. We are currently working on another feature that will allow us to achieve design rate faster. Let me explain what this is. Today, when a stage begins, the pump operator in the frac van ramps up the rate manually, selecting a gear and throttle one pump at a time. It takes time to do this, and it has performed somewhat haphazardly. This new feature which we call Autopilot will fully automate the ramp-up process, taking into account equipment capabilities and reservoir feedback. We are currently testing it and expect to roll it out in the coming weeks and months. By automating the entire process, getting to design rate faster and maintaining that rate throughout a stage not only improves the quality of stages, but also reduces or eliminates excess pumping time. This allows us to complete more stages for our customer over any given time interval. In addition, as I mentioned on our last call, our automation technology is being trained to optimize diesel displacement on our dual fuel pumps. The system will continuously monitor and control the throttle and gear of individual pump units to ensure that they are displacing at their maximum capability depending on conditions. When done manually, this process is dependent on the pump operator and the protocols built into the OEM kit. I can't say enough about how competitively differentiating these technologies are. We are confident that our current customers will continue to realize the benefit of our capabilities and prospective customers will want to try FTSI and end up working with us on a dedicated basis. Customers want perfect stages, and we are on the cusp of delivering just that every millisecond, every hour and every day, stage after stage. Lastly, I would like to talk about safety. Safety on location is extremely important to us and our customers. As we operate at all-time highs in terms of productivity, maintaining a strong safety culture is critical. Our total incident recordable rate, or TRIR, was 0.2% last year and 0.3 year-to-date. I am also pleased to report that we are quickly approaching 4 million man-hours with no lost time incidents. I'd like to give a big shout out to our operations, manufacturing and maintenance teams for doing an outstanding job. That's all I have for prepared remarks. I will now turn the call back over to Gene.
Gene Davis: Thank you, Mike. To wrap up, with a debt-free capital structure and cash flow improving, we have greater financial flexibility than ever before. The Board and management are considering the best ways to allocate our capital and expect to have more information as the year progresses. Depending on cash generation levels, I expect it could include a mix of growth CapEx and returns to shareholders. As an observation, our stock is currently trading at a fraction of the value of our peers, many of which are and will likely remain free cash flow negative. We also have an excellent liquidity position with cash on our balance sheet, representing 37% of our market cap. While I'm no doubt biased, I think that FTSI as a rare opportunity in today's market. I'd like to turn the call over to the operator to provide instructions for the Q&A section. Operator?
Operator: We do have a question from the line of John Daniel with Daniel Energy Partners. Please go ahead. Your line is now open.
John Daniel: Hey guys. Thank you for putting me in. Mike, first, congratulations on getting a contract to support the investment on the fleet. I'm curious if you could provide some color on whether or not is the customer shifting from Tier 2 to Tier 4? Is it an incremental? Just any color on what led them to step up with the contractual support.
Mike Doss: Sure. I think it's an incremental move. As you know, there's a lot of talk about these new engines and what they can do for emissions and displacement rates. And so I think just based on this company's ESG goals, they want to test it out. And so the rest of the fleets that we have working for them are Tier 2. There's no active discussions right now to convert the remaining fleets. This is really more of a test, I would say, for the customer, and I'm really glad that we're able to get a contract that made sense for both parties.
John Daniel: Okay. I know you mentioned that later on this year, you'll talk about sort of capital allocation strategies. But just as you think about the shift with E&P still looking to get more, realistically, how many further fleet expansions could unfold next year?
Mike Doss: Are you talking at the industry level or just for us?
John Daniel: No. I'm talking about you guys. I mean, I know you don't – probably don't even have a budget fraction, but just there are lead time issues and constraints. And so I'm not sure you're thinking about it as we, so.
Mike Doss: Yes. Yes. No, understood. So as Gene mentioned, we're going to consider capital allocation broadly and really what works best for our shareholders. And I think maybe one or two additional fleets next year is a reasonable possibility. They also will need to be supported by contracts to justify the investment and to keep us in this positive of cash generation mode as we can. We just haven't quite got to that decision. But something in that magnitude is a reasonable expectation based on what I know today, but it could certainly change.
John Daniel: Okay. Thank you very much.
Mike Doss: Thanks, John.
Operator: We have a question from Stephen Gengaro with Stifel. Please go ahead. Your line is open.
Stephen Gengaro: Thank you. Good morning, gentlemen. I guess two – couple of things for , but what I'd like to start with is you mentioned the pricing you saw in the second quarter and some guidance for third quarter increases. Can you talk a little bit about the competitive landscape? I'm hearing sort of modest pace in increments out there, and you guys seem to be having maybe a little more success than others. Can you just talk about what you're seeing out there? And maybe even as part of that, what your thoughts are on sort of the recent consolidation in the space and how you think that plays out?
Mike Doss: Sure. So just broadly, I think one thing that immediately comes to mind when thinking about 2021 is that our customers, the E&Ps are capital disciplined. I mean they are delivering on their capital budgets that they had talked about earlier. They're generating a lot of free cash flow. I think that's a healthy thing for them and what's healthy for them ultimately will be healthy for us. And so even though we've seen commodity prices move up quite a bit, we haven't seen activity move in lockstep. There has been improvements this year, but it's nothing as dramatic as what you might have expected in years past. And so I think, again, that discipline, I think, is going to be serviced well over time. In terms of OFS company behavior, there are still a lot of participants – there are just many companies that are competing against each other. I think consolidation is a good thing for the sector. I think it could reduce some excess capacity. I think it could lead to some more economic decision-making. So, there have been incremental moves over the last couple of years, relatively slow, but we do think that's a healthy move. And did on the E&P side, there has been consolidation on the E&P side. And I think, again, I think, that is good, healthy for the industry overall. So pleased see it. In terms of second half, I'd give some guidance on third quarter, we are seeing some incremental price improvement a lot of it is cost recovery. And so glad that we're being able to pass those costs through to customers, which makes total sense. But we're still nowhere near to kind of profitability levels that, I think, would be good for us and the industry. And so we're hopeful 2022 we’ll see a step up in activity as capital budgets get reset, and we’ll be in a great position to capitalize on that if it occurs.
Stephen Gengaro: If you don't mind, you mentioned the return profile of the new build fleet, which sounds very compelling. I'm just curious, is that slightly above your current spot, because it seems like the economics of that are delivering higher than fleet then than the existing fleet is now, just kind of trying to think about how that – maybe is that accurate, and may be what that tells you about what pricing might be going?
Mike Doss: It is accurate. And so, where we are on a spot basis is – so we were just under $5 million annualized EBITDA for the second quarter. We'll be a bit ahead of that for third quarter. And so there's still room for that to move up. But this incremental new fleet just is definitely a different price point to justify the investment. So you can do some quick math on that, but it's a good contract and glad that we were able to achieve it. But what it suggests is that, I think, there's a place for some of the newer equipment. I don't think the market is going to be giant for that, at least in the foreseeable future, as I'd mentioned in the call. And so, happy for us to participate that get some of the higher realized pricing, but the direction is definitely up into the right as it relates to this newer equipment. But I do think the overall scale is somewhat limited today, just because of economics for the customer.
Stephen Gengaro: Great thank you. And then maybe one final one, it might be for Lance, what you think about the kind of have the potential to be on at the end of this year? I mean, you should generate pretty strong, free cashflow next year, obviously working capital could build a little bit. But any big pieces I should be thinking about as far as free cashflow next year, outside of the CapEx that you just announced? And what happens with the working capital moves?
Lance Turner: No, I think that's really it. I mean, our capital structure is simple right now and our CapEx is what we estimate to be about $2.5 million per fleet. And so we do think there's when you get to these levels of EBITDA, we do think that's generating a decent amount of cash.
Stephen Gengaro: Very good. Thank you, gentlemen.
Operator: And we do have a question from Andy Clarage with Webs Creek. Please go ahead, your line's open.
Andy Clarage: Hey guys. Nice quarter. And thanks for taking our call. I just wanted to ask on the Q3 cadence and perhaps any color you could give off on an exit rate type EBITDA per fleet? Thank you.
Lance Turner: Sure. Yes, so I've mentioned just in terms of cadence, in terms of the shape of the quarter, a little light on the front end, but utilization is improving quite a bit this month and next month. So our exit rate will certainly be stronger than it was in the second quarter, which doesn't really tell you a whole lot. But our exit rate will certainly be higher than the $14 million to $17 million EBITDA for the quarter that I had spoke about earlier. So, we'll begin the fourth quarter at that higher level.
Operator: And there are no further questions at this time.
Mike Doss: Thank you very much operator. I want to thank all of you for your interest and we'll look forward to speaking with you again next time. And thanks for taking the time and for your support in the conference. Enjoy the rest of the day. Thank you. Bye-bye.
