Nuverra Environmental Solutions' (NES) CEO Charley Thompson on Q4 2017 Results - Earnings Call Transcript

Nuverra Environmental Solutions, Inc. (NES) Q4 2017 Earnings Conference Call March 6, 2018 8:30 AM ET

Executives

Robert Kennedy - VP of Finance and Treasure

Charley Thompson - Chairman and Interim CEO

Edward Lang - EVP, CFO and Principal Financial Officer

Analysts

Mario Cortellaci - Macquarie

Michael Hoffman - Stifel

Operator

Good morning and welcome to the Nuverra Environmental Solutions Fourth Quarter and Full Year Earnings Call. This call is being recorded and will be available for the next 30 days on the company's website at nuverra.com.

I would now like to turn the call over to Robert Kennedy, Vice President of Finance and Treasure. Robert, please go ahead.

Robert Kennedy

Good morning, joining me on the call today are Charley Thompson, Chairman and Interim CEO, Ed Lang, CFO; and Stacy Hilgendorf, Controller and Chief Accounting Officer. Today's presentation will contain forward-looking statements about our expected financial results and operational performance. These statements involve risk and uncertainties that could cause actual results to differ materially from our expectations.

Potential risk factors that could cause these differences are described in our SEC filings which may be obtained from the SEC or by visiting the Investor Relations section of our website.

All information provided on this call is as of today, March 6, 2018 and Nuverra undertakes no duty to update or revise this information. Today's discussion will also include certain non-GAAP financial measures including adjusted EBITDA. Reconciliation of our non-GAAP measures to the most closely related GAAP results can be found in the tabled attached to our press release announcing financial results for the quarter.

With that, I will turn the call over to Charley.

Charley Thompson

Thank you, Robert. Good morning everyone. Let me start by addressing the recent management changes. As you know last Friday, Mark Johnsrud left the company. He helped build the business, recently managed the company through the restructuring process, and leaves the company operationally and financially in a better position than it has been in a couple of years.

I was ask by the Board to serve as Interim CEO and I am looking forward to my new role and hope to help the company continue its positive momentum. I'll make a few financial comments and turn things over to Ed.

The company's fourth quarter performance reflects the improving energy services business, commodity prices were higher and activity levels have increased. Our Q4 revenue grew by approximately 30% compared to the fourth quarter of 2016 and our revenue for the full year increased approximately 16%.

We saw acceleration in price and volume levels starting in the second half of 2017 and the trend is continuing thus far in 2018. We saw even greater percentage improvement in our adjusted EBITDA, reflecting the better utilization of our assets and lower costs. Adjusted EBITDA in the fourth quarter more than doubled from the 2016 level. For the full year adjusted EBITDA improved by 70%.

I'd also like to make a few comments on our long-term business strategy as most of the challenges of reorganization are behind us. Number one, we now have a healthy balance sheet and access to capital to meet our growth plans; we have availability under credit facility, and recently sold assets that no longer fit with our long-term strategic plans. As a result, we have the liquidity to fund much needed maintenance capital expenditures and selective growth opportunities.

Number two, we will continue to look at our position in every market, to determine how to increase market share, profitability and return on invested capital, each base in which we operate has unique opportunities and we will invest and acquire to strengthen our platform.

Number three, we have a great group of employees, who deserve praise for their excellent performance throughout the reorganization in 2017. Similarly, I also want to acknowledge our customers and vendors who maintain their business relationships with us through the reorganization.

Number four, finally we are committed to providing the highest quality of service and a safe work environment for our customers and employees.

With that, I'll turn things over to Ed, for a more detailed review of the financial results.

Edward Lang

Thank you, Charlie, good morning, everyone. Nuverra's fourth quarter continued the industry uptrend from our third quarter performance. I'd like to take a few minutes to walk through several of those key metrics and provide some additional thoughts.

Given that this is our first full quarter of results since the reorganization, I'd like to start by noting that references to full year 2017 performance include the combined results of both the successor and predecessor periods. Most of the tables in our earnings release distinguish those periods in order to comply with GAAP guidance.

Total revenue was $46.4 million in the fourth quarter, compared to $35.8 million in the year ago quarter, an increase of nearly 30%. This was driven by improved pricing and increased business activity in all three of our operating regions. Service revenue, which includes trucking, pipeline and disposal activities accounted for the majority of the increase. However, our rental business while a smaller portion of the total also enjoyed similar improvement.

Year-over-year revenue increased from $152 million to $176 million, an improvement of almost 16%. This was driven by increases in drilling and completion activities across all operating divisions, which resulted in higher demand for the services we provide.

Compared to a year ago, direct operating costs in the quarter increased at a slower pace than revenue, primarily due to the impact of price increases on revenue. As a result gross profit which includes depreciation - which excludes depreciation and impairment and other non-cash costs improved from $7.4 million in Q4 of 2016 to $10.5 million in the fourth quarter of 2017. This resulted in a gross margin improvement of 190 basis points in Q4 of 2017 to 22.6%.

Depreciation expense also increased during both the quarter and the full year as compared to the same period a year ago. These increases are the result of adjustments to certain asset book values and related useful lives as determined through the application of fresh start accounting requirements during the reorganization. Due to these changes, non-cash depreciation charges increased in the near-term, but are expected to normalize after the first half of 2018.

Overall, G&A expenses decreased in the fourth quarter as compared to the same quarter of 2016, due primarily to higher non-recurring capital reorganization costs incurred in 2016. Normalized G&A expenses excluding those charges increased less than $200,000 during Q4 and fell $140,000 during the full year of 2017.

Interest expense for the full year of 2017 was $25 million, as compared to $55 million in 2016, driven by the reduction of our outstanding debt balance through the Chapter 11 reorganization. On a fourth quarter basis, which reflects the benefit of our lower debt balance, interest expense was $1.4 million in 2017 versus $13.9 million in 2016. We ended the year with total debt of $39 million versus $488 million at the close of 2016.

Our weighted average interest rate on the successor facilities was 9.9%. The company's net loss from continuing operations for the fourth quarter of 2017 was $30.9 million, as compared to a loss of $61.4 million in the same period a year ago. As noted previously, the primary driver was the reduced interest costs further supported by improvements in revenue and gross margins.

For the full year, we recognized net income of $120.7 million versus a net loss in 2016 of $167.6 million. The full year net income was a result of books recorded due to reorganization and cancellation of debt. As a result of the improved revenues due to pricing and volume, and despite the challenges of increasing operating costs, we realized an approximately two fold improvement in adjusted EBITDA in the fourth quarter as compared to the same period in 2016.

Fourth quarter adjusted EBITDA came in at $5.1 million versus $2.5 million in the same period of 2016. Full year adjusted EBITDA improved $5.5 million from $7.8 million in 2016 to $13.3 million in 2017. Adjusted EBITDA margin improved 240 basis points to 7.6% for the full year in 2017 and improved 400 basis points to 11.1% in Q4 of 2017.

Turning now to other financial measures, the company has increased capital spending to support the strengthening marketplace. Spending was $1.8 million in the fourth quarter and $5.4 million for the full year of 2017. In 2016 capital spending was $1.2 million in the fourth quarter and $3.8 million for the full year. The increased purchasing was financed impart by the sale of unused or unutilized assets for $2.4 million in the fourth quarter of 2017 and $7.1 million for the full year.

Not included in these fourth quarter figures for 2017 are the proceeds from the significant block of assets that were sold via third-party equipment auctions. These sales generated proceeds of $8.4 million, which were collected in the early part of 2018.

The company dramatically improved its liquidity position as the result of the Chapter 11 reorganization and resulting recapitalization. Total availability at December 31 was $20.5 million, as compared to $16.6 million at September 30, 2017. This consisted of $5.5 million of cash $9.3 million of availability under our undrawn revolver and $5.7 million of delayed draw option from our term loan.

Our liquidity position improved further in 2018 as we received $8.4 million of proceeds from the previously mentioned auction. We have already begun reinvesting these proceeds in projects and equipments that we believe will grow the business in 2018.

We continue to enjoy strong relationships with our important customers, which is evidenced through our stable cash collection performance throughout the challenging year we had. Fourth quarter day sales outstanding was 61 days, keep in mind that at current revenue levels each day of DSL improvement results in roughly $500,000 of cash flow improvement.

Finally I would like to draw your attention to our impressive safety performance during the period. TRIR which stands for total recordable incidence rate is a common benchmark in the industry to measure injury prevention performance improved from 1.47 at the conclusion of 2016 to 0.96 at the end of 2017.

With Nuverra's focus on safety, strong industry fundamentals and a positive organic growth the company is well positioned to further improve financial performance in 2018. Rochelle we will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And now will take our first question from Hamza Mazari with Macquarie.

Mario Cortellaci

Hi this is actually Mario filling in for Hamza. How are you?

Charley Thompson

Very good, Mario.

Mario Cortellaci

Just with the recent announcement of the change in leadership just wondering what you will be looking for in new CEO? And do you expect that there would be any changes in your strategic direction or business strategic, when finding that person?

Charley Thompson

Yes, hey Mario, this is Charlie. I have been in the seat for about a day. So I am not going to probably give you a perfect answer to that question I think the charge that I have been given by the Board is to take a little bit of time, which is in the to be determined category to figure out everything that's going on in the business, evaluate the market, look at the people, figure out where we are strong, figure where we need to go and from that we'll have conversations with management and the Board and calibrate the type of person we are looking for.

Obviously will need some expertise in the trucking space and the question is going to be what skill set are we going to want to see supplementing that key part of the company whether it's pipe or chemicals or anything like that.

Mario Cortellaci

Got you. And could you give us a sense of your CapEx priorities in 2018? I mean, maybe even your capital allocation and where M&A might fit into that for the year?

Edward Lang

Mario, given that the company had wider capital spending over the past few years, we probably do have a little bit of catch-up spending to do. So we went through a very detailed budget review process and did come up with an allocation of capital that with the company's liquidity were more than adequately fund. And in that mix this kind of beginning of process to kind of get the fleet younger.

We are also looking at other projects as related to disposal wells, also some mode of treatment opportunities and also the expanding our investment very recently in the water transfer business that we have had some early year success in getting some high margin projects related to water transfer. So it is spread out through all of our core businesses and throughout multiple regions. So a pretty broad based capital spending plan for 2018.

Charley Thompson

And Mario, I will add one thing, because I think you included at the end of that question a comment about M&A.

Mario Cortellaci

Correct.

Charley Thompson

Yes, I know you never like to have that untouched. The attitude there is the company has working its way over the course of 2017 through the restructuring, currently has a healthy balance sheet. And there is a fair and has been a fair amount of M&A and strategic activity out there in the space as there always is, but there have been some midstream deals done. There is some others in the market and we're going to look at all of those.

I can't tell you what we're going to do, what we have allocated to that kind of activity, but certainly if it's something that fits well with the business and we think it's going to improve the company's position we're going to look hard at it, we have the blessing of the Board and the shareholders to do that.

Mario Cortellaci

Thank you so much for your time.

Charley Thompson

Thank you, Mario.

Operator

[Operator Instructions] Next we move to Michael Hoffman with Stifel.

Michael Hoffman

Hi, thank you for taking the questions. Can we talk a little bit about what you are seeing as far as market activity by basin? And then in particular give that the Bakken is the heart of this on a relative basis. What sort of your visibility around better activity now that we've been - seems to be over $60 for a while?

Charley Thompson

Can you repeat that question little bit, sorry Michael, its Charley.

Michael Hoffman

Yes, no problem. Sorry I am in a unfriendly environment unfortunately, I was curious if you could share with us your outlook by basin, what you are seeing as far as what's happening relative to [Technical Difficulty].

Charley Thompson

Sure, Michael. I think what we've seen is very broad based recovery in the industry. We had some stats in the additional tables in the back of the report, but we've seen increase - significant increases in the number of rigs like for instance in all of the bases where we operate, we've seen the rig count bump from 132 to 227, which is about a 73% increase in rigs. We've seen a 32% increase in wells completed. And even when you kind of look at what's out there is addition we've seen a nice pickup in drilled, but uncompleted wells. So that just tells you there is more production out there ready to be tapped.

So, I think if you look at the kind of those core fundamentals as to what's the drilling activity, what are the number of wells, it's all very positive. And then one of the things that we've also seen is the amount of water that come off these wells is also increasing. So all of those are very positive for us, as we've seen in the past, it can be a cyclical business based on energy prices. But with oil here in the $60 neighborhood, we're seeing definitely a pickup in activity through all of our basins.

But as just so for folks who might be new to the story, the Bakken represents about 60% of our total revenue, so what's going on up in Western North Dakota has a very significant influence on our overall results. But again, we've seen nice pickup in our Northeast which is the Marcellus and Utica basins, as well as the Haynesville and Eagle Ford.

Michael Hoffman

[Technical Difficulty]

Edward Lang

Michael, I think your cell connection is breaking up again.

Michael Hoffman

Okay. Income and capital spending, is this the disposal on disposal, salt water disposal…

Edward Lang

Yes, we are - Okay, you are kind of breaking up, I'm trying to guess is to what the question is, but we do have a portion of the capital spending plan looking at additional SWD investment. We're looking at a couple of several new opportunities in both the Bakken and in the Northeast. And so we will continue to develop our disposal capacity as it's needed.

Michael Hoffman

Given my phone I'm going to thank you for taking my questions.

Edward Lang

All right, Michael, thanks for calling in.

Operator

And that will conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Ed Lang, for any additional or closing remarks.

Edward Lang

Thanks, Rochelle. I would like to thank everyone for listening to our earnings call today. And we look forward to talking with you in the future and have a good day. Thank you.

Operator

And that will conclude today's call. We thank you for your participation.