U.S. Markets closed

Edited Transcript of CRR earnings conference call or presentation 25-Apr-19 3:30pm GMT

Q1 2019 CARBO Ceramics Inc Earnings Call

HOUSTON Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of CARBO Ceramics Inc earnings conference call or presentation Thursday, April 25, 2019 at 3:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gary A. Kolstad

CARBO Ceramics Inc. - President, CEO & Inside Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, and welcome to today's CARBO Ceramics' First Quarter 2019 Earnings Conference Call. Please be advised this call is being recorded today, April 25, 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, and welcome to everyone to our first quarter 2019 earnings call. For today's call, I'll provide a summary of our first quarter results and then an update on our outlook before opening it up for questions.

Before we start on the details, I want to spend a little time talking about where we are in the transformation process, what is going well, what challenges remain that we are tackling and lastly, to provide a longer-term outlook.

As we continue to move forward with our transformation process, we are pleased with the execution of the strategy to utilize CARBO's 4 clear strings of people, technology, manufacturing and marketing and sales in order to diversify our revenue streams into more profitable businesses and reduce our reliance on the cyclical oil and gas industry. To this extent, we've seen very good growth in our oilfield ceramic technology products and good overall growth in our industrial and environmental businesses. To illustrate the success of this evolution for the first 35 years, over 80% of our business was base ceramics. In 2019, we expect it to be less than 20%.

As an overall company revenue mix, our industrial and environmental businesses made up approximately 22% of our total revenue last year, and we expect that to grow to be close to 30% this year. We can envision that in 5 years, our revenue might be approximately 50% oilfield and 50% industrial and environmental combined.

As we come back from the oil and gas industry low point in 2016, we have seen good fall-through on EBITDA from the revenue gains. Last year, it was approximately 90%, and we expect significant fall-through again this year due largely to a combination of growing more profitable businesses, commercializing new products and continually finding ways to cut costs.

The profitable markets we are targeting in our transformation are of significant size. To ensure we are targeting the right market subsectors, we have looked at the total market size and estimated reasonable expectations of our growth rates we can attain in them. From this, we have put together a 3-year outlook on where the company revenues could be. It's important to know that this analysis does not include any M&A possibilities. So what does this look like? Based upon a 3-year framework with growth rates of single-digit growth in oilfield, low-double-digit growth in environmental and mid-double-digit growth in industrial, we have modeled baseline revenues approaching $300 million with upside revenues of $400 million. This is based upon an approximate 60% oilfield and 40% industrial and environmental combined revenue split at the end of 3 years.

Now I'll give you an example of how we look at sectors. Industrial business has a lot of potential for us to utilize the large assets in technology we originally built and developed our oilfield. The industrial sector has many subsectors, but overall, we estimate well over $1 billion market with numerous subsectors. We have been in the foundry and grinding subsectors for many years, but have put a lot of emphasis on them in the last couple of years as the oilfield demand weakened.

With this increased marketing and sales investment combined with new product development, we've experienced an annual growth rate of approximately 35% over the last couple of years. We feel we are just at the start of this growth as we are now working on numerous other subsectors such as filtering and catalysts.

Another example of how we looked at and developed entry into the market is metakaolin. We've commercialized a premium metakaolin called METAKAO, that is performance metrics that exceeds competitors' products and recently received sales for a large infrastructure project as mentioned in our press release. We believe the market for metakaolin approaches $100 million and we have started our entry into it.

Overall, if we are successful on this transformation road map, we expect very positive changes in our financial results. It's important to note that given our asset base today, we would not expect to need large amounts of capital to execute this plan. Therefore, we would expect to be producing positive cash flow and EBITDA during this period and by the end of that period, overcome our depreciation burden to attain positive GAAP earnings. Will this be easy? No. But is it achievable? Yes.

As a company, we do not want to have our fortunes primarily dictated by rig count and/or oil and gas commodity prices.

Now turning to the first quarter details. Our first quarter consolidated revenues declined year-on-year. We're pleased to see our industrial sector and environmental sector revenue increase.

The continued volatility in our oilfield sector reinforces our belief that we are on the right path to return the company to profitability by diversifying our revenue streams and reducing our reliance on the oil and gas industry. To support this diversification effort, we continue to develop and commercialize products for all 3 of our market sectors.

Maintaining solid cash balance during the execution of our transformation strategy is of high importance. We are pleased that our quarter ending cash balances exceeded our plan.

Our oilfield sector revenue for the first quarter of 2019 decreased 10% year-on-year and comprised approximately 75% of consolidated revenue. Although oilfield sector revenue was down year-on-year due to lower North America activity, international product sales grew in the first quarter of 2019 compared to last year.

Our oilfield ceramic technology-related products revenue decreased 32% year-on-year due in large part to the timing of sales for our ceramic technology products, which can vary quite a bit from one period to the next.

Ceramic technology sales for the quarter were in line with our expectations. During the quarter, we saw lower CARBOAIR and KRYPTOSPHERE LD sales year-on-year partially offset by an increase in CARBONRT sales.

E&P operators have started the year cautiously with respect to discretionary spending, which also impacts oilfield service companies, in which the combination impacts are FRACPRO fracture simulation software revenue, which decreased 19% year-on-year.

STRATAGEN consulting revenues increased 9% year-on-year.

Base ceramic revenue for the first quarter of 2019 decreased 2% year-on-year and frac sand-related revenue decreased 13%. While we continue to move towards a production-on-demand model for base ceramic, the sales of no longer stock-based ceramic inventory can require lower pricing or higher transportation costs in order to monetize these nonstock sales -- nonstock items. Sometimes, this is to the detriment of EBITDA.

Our industrial sector revenue for the first quarter of 2019 increased 44% year-on-year and comprised of approximately 10% of consolidated revenue. Industrial ceramic product sales increased 40% year-on-year.

In the foundry market, operators are able to eliminate health risks associated with silica dust exposure amongst their workforce, increase their end product quality and reduce their operating costs by utilizing our ceramic casting media.

In the grinding market, we expanded our product portfolio to increase larger grinding media, which opens up more sales opportunities for us.

Contract manufacturing revenue increased 64% year-on-year primarily due to manufacturing in industrial product for an existing client. The growth in contract manufacturing results in improved fixed cost absorption at our manufacturing facilities.

During the quarter, we also continue to work on the commercialization of the PicOnyx M-Tone products, a new family of functional pigments for the plastics, paint, ink, coatings and adhesives market.

Our environmental sector revenue for the first quarter of 2019 increased 7% year-on-year and comprised approximately 16% of consolidated revenue.

ASSETGUARD revenue growth was primarily driven by a 10% increase in our TANKGUARD sales and an increase in activity in our mid-continent region. In addition, we continue to penetrate the industrial markets with our ASSETGUARD products.

Now look at the financial results. Revenue for the first quarter of $47.5 million decreased 4% compared to revenue of $49.4 million in the same period of 2018. The largest contributors to this decrease were the declines in sales of base ceramic and sand products as well as ceramic technology products and services. These decreases were partially offset by a 44% increase in industrial products and services and a 7% increase in environmental technologies and services revenue as well as an additional $1.5 million in sublease and rental income. Due to a change in accounting standards as of January 1, 2019, these amounts were classified within revenues during the 3 months. These amounts were previously classified as a reduction of costs for the period ending in March 31, 2018.

Operating loss for the first quarter of 2019 improved to $18.2 million as compared to $20.2 million in the same period of '18 primarily due to reduction in under-absorption costs. Approximately 48% of the operating loss for the first quarter of 2019 consisted of noncash expenses.

Adjusted EBITDA improved by approximately $1 million year-on-year driven by improved revenue mix, higher pricing and lower costs.

Now turning to our outlook. We continue to execute our transformation strategy to diversify our revenue streams to the more profitable oilfield ceramic technology products and the industrial and environmental markets.

Developing and commercializing new products for all 3 of our market sectors supports this diversification effort. Despite E&P operators starting the year cautiously with respect to discretionary spending, we still expect our 2019 revenues will be similar to 2018 levels as growth in our ceramic technology and industrial and environmental sectors will likely offset declines in our base ceramic and sand revenues.

Through year-on-year growth in these more profitable areas, we expect to see strong year-on-year EBITDA incremental margins for 2019.

Looking at the oilfield sector, we expect stronger ceramic technology sales during the second quarter of 2019. One KRYPTOSPHERE HD well is scheduled for late in the second quarter and our current project list for KRYPTOSPHERE LD is expected to result in a significant uptick in sales during the quarter.

Although we expect 2019 deepwater activity to be down year-on-year, our initial outlook for 2020 is robust with high-double digit growth given the current projects that are known.

Client conversations and leading-edge offshore commentary gives us confidence that our KRYPTOSPHERE products will see a strong uptick in 2020. Our KRYPTOSPHERE product family has become the standing bearer for proppant use in these offshore environments. From early adoption of KRYPTOSPHERE HD by one super major to now many operators utilizing it, including KRYPTOSPHERE LD and KRYPTOSPHERE XT, our KRYPTOSPHERE family products can address any oil conditions in the world, including the harshest and highest stress wells.

Overall, we are pleased with our expanding client base since we launched the product line and potential revenue generation from this family of products would bring in 2020.

Demand for our STRATAGEN consulting business is expected to increase in the second quarter of 2019 as clients complete more projects than in the first quarter. In addition, with improving domestic activity, software sales should benefit in the second quarter.

As we look out over the balance of 2019, we expect continued contribution from the international oilfield sector for both technology and base ceramic products. In the industrial sector, we remain excited about our industrial ceramic opportunities. In order to continue this growth, we are pursuing product trials with potential clients around the world.

Our latest product we've introduced for industrial is METAKAO, our premium metakaolin for the concrete industry. METAKAO when blended with concrete mix, the mixture is stronger and more cohesive resulting in efficiencies during pumping and finishing processes.

In recent third-party tests against other metakaolin providers, METAKAO significantly outperformed competing products during the evaluation of compressive strength and water intake, which showcased its value to clients for concrete applications.

Looking at contract manufacturing, we expect continued grow throughout 2019. While some clients have postponed decisions on project awards, we are making progress in other areas by expanding the products we produce. These contract manufacturing opportunities that increase our plant utilization and generate cash are important in our path to profitability.

Regarding our PicOnyx investment, we are currently working to finalize our asset contribution in exchange for a minority position in the company. In addition, we are learning a tremendous amount as we scale up the M-Tone process in our manufacturing facility.

We continue to believe that the product will be in the market in the second half of 2019.

In environmental sector, in addition to the contract awarded in the Northeast that started during the second quarter of 2019, we are adding resources to further develop industrial sales.

ASSETGUARD products are seeing success in industrial applications, including evaporation mitigation, pond liners, mobile office flooring and retail applications. We expect these additions to drive increased industrial revenue throughout 2019. Other primary areas of focus will include energy generation and petrochemicals facilities.

We are currently pursuing oilfield ceramic technology product and industrial and environmental market opportunities at an accelerated pace, which should improve our overall profitability as these revenues grow over time.

In addition, given our minimal capital expenditure requirements, we expect to maintain a healthy cash balance.

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

--------------------------------------------------------------------------------

Operator [3]

--------------------------------------------------------------------------------

(Operator Instructions) Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn back to Mr. Kolstad for any closing remarks.

--------------------------------------------------------------------------------

Gary A. Kolstad, CARBO Ceramics Inc. - President, CEO & Inside Director [4]

--------------------------------------------------------------------------------

Well, I hope I explained the transformation strategy and everything pretty well and maybe with a more detailed explanation we put upfront there that, that's answered a lot of the questions that people had. There are a couple of key points as we close. I just want to say, we're making a lot of progress on our transformation execution and we'll keep pressing forward with intensity as we grow in these new markets and with these new products. And we look forward to seeing you at the next quarterly review. Thank you.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

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