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Edited Transcript of CRR earnings conference call or presentation 31-Jan-19 4:30pm GMT

Q4 2018 CARBO Ceramics Inc Earnings Call

HOUSTON Feb 1, 2019 (Thomson StreetEvents) -- Edited Transcript of CARBO Ceramics Inc earnings conference call or presentation Thursday, January 31, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary A. Kolstad

CARBO Ceramics Inc. - CEO, President & Director

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Conference Call Participants

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* John H. Watson

Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Hello, and welcome to today's CARBO Ceramics Inc. Fourth Quarter and Year-end 2018 Earnings Conference Call. (Operator Instructions) Please be advised, this call is being recorded today, January 31, 2019, and your participation implies consent to our recording this call. If you do not agree to these terms, simply disconnect.

Some of our comments today may include forward-looking statements reflecting the company's view about future prospects, revenues, expenses or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company's press release and public filings.

Our comments today also include non-GAAP financial measures. These non-GAAP measures, including EBITDA and adjusted EBITDA, are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net loss to EBITDA and adjusted EBITDA, as discussed on this call, is presented in the company's earnings release, which is available on its website.

Your host for today's call is Mr. Gary Kolstad, President and Chief Executive Officer of CARBO Ceramics Inc. Mr. Kolstad, please begin your call.

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Gary A. Kolstad, CARBO Ceramics Inc. - CEO, President & Director [2]

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Thank you, and welcome, everyone, to our Fourth Quarter and Fiscal Year 2018 Earnings Call. For today's call, I'll provide an overview on the accompaniments in 2018 followed by a brief highlight of our financials and an update on our outlook for 2019 before opening up for questions.

Our transformation strategy continued to show solid progress during 2018. Our gross loss was reduced by $31 million year-on-year, and adjusted EBITDA improved $20 million year-on-year, with a $22 million increase in revenue and as a result of focusing on growing our technology products and services as well as continued cost reductions. In addition, excluding the sale of the Millen plant, we maintained cash neutrality in the second half of 2018, during a period of lower oilfield activity. Maintaining healthy cash balances is our highest priority.

I want to emphasize that our transformation strategy for CARBO is showing good success. We are growing at high rates in the more profitable business sectors and becoming much less reliant on the deeply cyclical and highly price-sensitive North American oilfield. We are becoming less reliant on rig count and completion activity as we continue to see the benefit of our transformation. As a measurement of that, in 2017, 18.7% of our revenue was in the industrial and environmental sectors. In 2018, that revenue grew to 22.3%. And in 2019, it could be 1/3 of our company revenue. This factor along with the growth in oilfield technology products is the reason we are seeing such good incremental fall-through in gross margin and adjusted EBITDA.

Now moving onto sectors. In the oilfield sector, revenue for 2018 increased 14% year-on-year and comprised approximately 78% of total consolidated revenue. Our oilfield technology-related products revenue increased 15% year-on-year, led by growth in CARBOAIR, CARBONRT and the KRYPTOSPHERE family of products. STRATAGEN consulting revenue increased 38% year-on-year and FRACPRO fracture simulation software business revenue increased 22% year-on-year. This revenue increase was primarily driven by new client growth and an increase in industry activity.

Base ceramic revenue for 2018 increased 3% year-on-year, while Frac sand-related revenue increased 21% year-over-year. The decline in the industry's demand for frac sand, seen in the second half of 2018, impacted our sand sales volumes, resulting in a decline relative to the first half of 2018.

In the industrial sector, revenue for 2018 increased 24% year-on-year and comprised approximately 7% of our total consolidated revenue.

We continue to execute on our transformation strategy by growing sales in the industrial market. The grinding market was strong in 2018, and we continued to expand our product portfolio to open up new markets during the year. For foundry, our ceramic media also found success through full sand-to-ceramic media conversions at multiple client plants.

Identifying different ways our manufacturing expertise and assets can be used continued to be a key objective in 2018 and one that drove high incremental margins for us year-over-year as we increased our contract manufacturing revenue.

In addition, we are very excited about our partnership with PicOnyx, developer of M-Tone, a new family of functional pigments for the plastics, paints, ink, coatings and adhesives markets.

In environmental sector, revenue for 2018 increased 39% year-on-year and comprised approximately 15% of our total consolidated revenue.

ASSETGUARD revenue growth was driven by client gains and the expansion of product sales outside the oilfield. Our exceptional year for our environmental sector was led by a 69% increase in sales of GROUNDGUARD, our impermeable liner technology that protects any agricultural, industrial or commercial site against leaks or spills of fluid.

Our product sales growth continues to drive profitability improvement in a competitive market.

Turning to an overview of the fourth quarter financial results. Cash and cash equivalents and restricted cash grew sequentially by approximately $24 million to $83 million. Excluding proceeds from the sale of Millen, cash and cash equivalents and restricted cash grew sequentially by approximately $1 million to $60 million.

Revenues for the fourth quarter of $49.6 million decreased 18% compared to revenue of $60.3 million in the same period of 2017. The largest contributors to this decrease were declines in the sales of base ceramic and sand products.

Operating loss for the fourth quarter of 2018 increased to $18.9 million as compared to $17.3 million in the same period of 2017, primarily due to loss on the sale of our Millen plant.

Approximately 55% of the operating loss for the fourth quarter consisted of noncash expenses.

I'd like to highlight several items that negatively impacted EBITDA for the fourth quarter.

First, start-up of contracted sand volume shifted to the right during the quarter. Accordingly, certain cost benefits that were anticipated did not materialize until mid-December.

Second, 2 existing contract manufacturing clients shifted production from Q4 to Q1 of 2019.

Third, there was over 20 million pounds of base ceramic inventory sold that falls under, what we call, no-longer stocked products. This is part of our strategy to reduce inventory levels, which benefits cash but burdens the P&L.

We reduced this no-longer stocked inventory by 50% in 2018 and expect further reductions in 2019. These items impacted adjusted EBITDA in the fourth quarter.

For the full year, cash and cash equivalents and restricted cash grew by approximately $5 million to $83 million. Revenues for the year of $210.7 million increased 12% compared to revenue of $188.8 million in 2017, resulting from the solid revenue growth in environmental, industrial and oilfield technology products and services.

Now turning to our outlook. Our transformation strategy is working. We are very pleased with the profitable growth in our industrial and environmental business sectors. The growth of these 2 sectors should result in a balanced portfolio that is less susceptible to swings in oil and gas commodity prices. We're also pleased with oilfield technology products' and services' profitable growth and expect to retain our leadership position in those products and services.

In the oilfield sector, E&P operators' focus on free cash flow, coupled with recent oil price volatility, creates a less than certain environment with regard to drilling and completion spend in 2019. Current expectation by some industry analysts are predicting 2019 drilling and completion spend to be down high single digits on a percentage basis compared to 2018.

However, we are seeing positive signs internationally that should bode well for our oilfield sector products.

The industrial sectors provide a very large multiyear growth opportunity for CARBO. In the mining sector, more companies have started increasing their operating and capital spend, which supports our CARBOGRIND product growth. In the foundry industry, the value of our products bring to client's end-product quality, along with the need to comply with OSHA Permissible Exposure Limits silicosis regulations, supports our CARBOACCUCAST product growth.

In both these sectors, and in numerous other industrial sectors, our ceramic technology products are seeing market share growth.

The environmental sector continues to see growth as companies in various industry sectors continue to be more environmentally conscious. This provides us with a multiyear growth opportunity, in which we will put a strong focus at growing at higher rates in industrial sectors.

Based on the above and expectations for profitable growth in industrial and environmental sectors and oilfield technology products, and until quite recently, we anticipated our 2019 revenue to be similar to 2018 and lead to another year of significant EBITDA fall-through.

Our approach to 2019 annual revenue forecast given the volatility in oil and gas industry was conservative. Recently, certain unplanned client sales gains in both base ceramic and confirmation of technology ceramic jobs gives us more confidence. With these gains, 2019 annual revenue could likely exceed 2018 annual revenue. However, we remain cautiously optimistic.

In the oilfield sector, we expect continued strong growth for our international ceramic technology sales in 2019. Demand for our technology continues to increase in South America, Europe, Africa and the Middle East.

In North America, the opportunities set for our ceramic technology sales remain strong with KRYPTOSPHERE HD projects currently weighted more to the second half of the year.

On the fracture technology design and analysis front, demand for our STRATAGEN consultants and our FRACPRO software is expected to remain strong as our clients utilize these offerings to optimize their completion designs and return economics.

At this time, we anticipate base ceramic sales and frac sand sales to decrease single digits on a percentage basis, similar to the lower industry expectations for drilling and completion spend.

For base ceramics, we continue to drive business model changes towards production on demand, along with upfront cash commitments. For frac sand, a high percentage of our sand capacity is under contract, from which we are also benefiting from the use of railcars and distribution center.

In the industrial sector, we expect strong double-digit growth in industrial revenues in 2019 through continued growth of our ceramic media in both grinding and foundry markets.

Our industrial ceramic client list is expanding globally and should lead to improve market share for our technology products. We are also developing new markets while expanding the existing markets we sell into through a broader range of technology product offerings.

Our PicOnyx investment is off to great start. We recently initiated the first phase of the manufacturing process. M-Tone pigment should be in the market during the first half of 2019, and we expect production to ramp up over the course of the year.

CARBO has world-class manufacturing expertise. This manufacturing expertise is used to develop solutions for our clients. There are a number of contract manufacturing opportunities in the queue. We expect to grow both in revenue and by expanding the types of products we produce. Their benefit has the potential to be significant as these projects take idled assets and turn them from cash consumers to cash producers.

Environmental sector. Growth in product sales and expanding our reach outside the oilfield should result in revenue growth for ASSETGUARD in 2019. We are increasing resources specifically dedicated to growing industrial and other end-market sales. ASSETGUARD continues to lead the industry in developing technology products for our clients to address their ongoing challenges.

So to kind of bring it all full circle, progress on our transformational strategy will continue in 2019 as we continue to focus on diversifying our revenue streams, maximizing profitability across the businesses and maintaining healthy cash levels.

We expect to be cash neutral in 2019, excluding the planned debt repayments.

And with that, I'll turn it over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from John Watson of Simmons Energy.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [2]

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Gary, on the positive signs internationally for oilfield tariff products, I know we've -- there's some part on that in the release, and I'm sure you've touched on in the prepared remarks, but can you provide any more color on which products and which regions and what the opportunity size might be moving forward?

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Gary A. Kolstad, CARBO Ceramics Inc. - CEO, President & Director [3]

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Yes. The -- one of the pleasant surprises has been KRYPTOSPHERE LD being used in several of those markets. Another pleasant surprise has been CARBONRT, our nonradioactive tracer. Probably, those 2, more than any other, are what gives us a lot of confidence. We also -- I mean, in a general sense, as you see the international activity pick up, which has kind of been well said by the big service companies that reported already, there is increase in base ceramic as well. We've actually got a good historical look at this. In the last couple of years, we've been growing our international business with base ceramic and technology at a pretty decent rate. I think it's pretty well known that the North American activity has a different path towards technology and all those things. But we've been doing very well internationally.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [4]

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Okay, great. That's helpful. On PicOnyx, we've got some great color this morning, but in terms of affecting earnings, affecting the bottom line, will it be a trial partnership or -- the first half of the year, will it only be trial product? Or will we actually see some revenue from that product? And then other partnerships like that, are those possible? Are those something that you are contemplating right now?

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Gary A. Kolstad, CARBO Ceramics Inc. - CEO, President & Director [5]

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Yes. We have a -- see, we have 2 contract manufacturing clients that start literally the first week of February, I guess, it is. And then on the PicOnyx, remember, we're -- it's a brand-new product with incredible technology application. And I think, pretty soon, you'll see more information on that. We have produced the product recently, and -- so it's going out to clients that are -- and this has been handled by PicOnyx. We have a service agreement to manufacture it, and we've dedicated assets to it and have an ownership position. But it's one of those products we're extremely excited about. You have a high-technology product. It's extremely valuable. There is a lot of different end markets you can go into, into high-end markets, right? And so I think the PicOnyx team has done a good job of focusing the market. They've got the clients lined up that are kind of waiting a little bit on us, right, to produce more volumes, and -- but we're going through a process. You have to get a certain amount of permits and things like that. But when we started producing this 2 weeks ago, we're happy with that. We'll get some permits. And I think you'll see in the second half higher volume output for us. For me, I'm -- I think longer term, this is a great business for us. I think it's going to be a great product. And you'll just see more and more about that.

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Operator [6]

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The next question will come from Bill Dezellem of Tieton Capital Management.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [7]

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You referenced in the release a Bakken operator that recently started using the CARBOAIR. Would you provide a little more color around that operator? Whether they are a public company, a private company, large or small? And what's the end use technology when -- as you've seen in the last few years, technology has not been favored by a lot of the onshore players.

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Gary A. Kolstad, CARBO Ceramics Inc. - CEO, President & Director [8]

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Yes. It's a very large, very old private company with a name that's well known. The reason they are trying this is -- the beauty of CARBOAIR is its transport characteristics. It's lighter than sand, and -- so they are trying to extend the fracture geometry, the fracture length, the fracture height and just get better reservoir coverage. What's kind of neat for us is that there is a couple of different products that are being tested against it. So we can't -- we actually don't know all the results of that. We have some preliminary results, which actually are pretty exciting for us. But you hate to really talk about that until you get several months in production. But the initial signs compared to other lower-tech products is positive.

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Operator [9]

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And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Kolstad for closing remark.

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Gary A. Kolstad, CARBO Ceramics Inc. - CEO, President & Director [10]

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All right. Well, thanks, everybody, for joining and listening to us today. We're actually very pleased with how far we've come in transforming CARBO. We expect continued profitable growth in our oilfield technology, the environmental and industrial sectors. And we're pretty cautiously optimistic that 2019 revenue will exceed 2018. We expect significant EBITDA fall-through as this transformation process takes place. As we've mentioned several times, cash is a priority. We really like our net debt position today. We basically have, at the end of the year, we're at $83 million in cash and $92 million in debt. So we like that position. We like the partners we're working with to develop technology. And we expect cash to actually be neutral this year. And we look forward to seeing you next quarter. Thank you very much.

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Operator [11]

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The conference has concluded. Thank you for attending today's presentation. You may now disconnect.