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Edited Transcript of FI earnings conference call or presentation 6-Nov-18 4:00pm GMT

Q3 2018 Franks International NV Earnings Call

DEN HELDER Nov 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Franks International NV earnings conference call or presentation Tuesday, November 6, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Blake Holcomb

Frank's International N.V. - Director of IR and Communications

* Kyle McClure

Frank's International N.V. - Senior VP, CFO & MD

* Michael C. Kearney

Frank's International N.V. - Chairman of the Supervisory Board, President & CEO

* Scott A. McCurdy

Blackhawk Specialty Tools, LLC - President

* Steven J. Russell

Frank's International N.V. - President of Tubular Running Services

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Conference Call Participants

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* Bradley Philip Handler

Jefferies LLC, Research Division - MD & Senior Equity Research Analyst

* Ian MacPherson

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

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Presentation

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Operator [1]

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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. (Operator Instructions) And please note the conference is being recorded. I will now turn the call over to Blake Holcomb.

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Blake Holcomb, Frank's International N.V. - Director of IR and Communications [2]

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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 prerecorded prepared comments for 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 wanted 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.

The 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'd 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 if 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. 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 of 2018 earnings release, which was issued by the company earlier today.

We will now play Mike and Kyle's prerecorded commentary and then move to Q&A.

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Michael C. Kearney, Frank's International N.V. - Chairman of the Supervisory Board, President & CEO [3]

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Thank you, Blake. We appreciate everyone joining us today for the call. Beginning on Slide 4, I will go over some of the key drivers of our third quarter results. On our last earnings call, we discussed our expectations of lower third quarter revenue, primarily due to the completion of a number of international projects during the second quarter and operational changes in customer schedules. The slight decline we saw on our top line results was actually better than we had anticipated, but more importantly, we grew sequential adjusted EBITDA from the second quarter.

Adjusted EBITDA for this year's third quarter was the highest level we've seen since the first quarter of 2016. A lot of work has been done within the organization to improve the company's financial performance. I want to once again thank our employees for their dedication, hard work and diligence through these challenging times. The main driver of our growth and adjusted EBITDA was our U.S. Services segment. Revenue for this segment increased 9% from the second quarter due to strength in both our onshore and offshore business. As a reminder, this segment also includes corporate G&A, where we saw important cost reductions from the second quarter.

U.S. onshore TRS continued to benefit from increased activity and higher prices. We also saw growth in the Gulf of Mexico through increased market share as we displaced the competitor on 2 rigs during the quarter. Results for our International Services business were impacted by the completion of certain projects in Canada, Latin America, Asia Pacific and Africa as well as a decline in ad hoc callout work. This impact was partially offset by new projects in Africa and Europe.

Our Blackhawk segment saw continued growth in revenue and margins for the third quarter, driven by record product and service revenue in its U.S. onshore business and increased well intervention work in the Gulf of Mexico. Additionally, during the third quarter, Blackhawk's International business continued to make strides, and we expect this part of their business to more than double for the full year 2018.

Turning to Page 5, I will provide an update on our 3 near-term strategic priorities: first, we continue to put significant focus on the optimization of our Tubular Running Services business. Our efforts are centered around providing customers best-in-class offerings that will allow us to capture additional market share and profitability as the market continues to recover. During our second quarter earnings call, we discussed the evaluation of our global geographic footprint, whereby we grouped our location configurations into 3 categories: 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 new-term focus is to capture high-value opportunities in our core and flex countries. As we've said in the past, the best outcome is for Frank’s to have our proprietary technologies 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 aggressive flow of tool. Our entire fleet is currently fully deployed, and we are expanding capacity as quickly as possible to meet increasing customer demand for this tool.

Our second near-term priority is the international expansion in Blackhawk, with a focus on high-value markets. We've made significant progress in driving customer awareness and adoption of Blackhawk's rental and product offerings since acquiring this business in late 2016. For the first 9 months of 2018, we experienced an approximate doubling of international revenue compared to the same period last year. Contributing to this growth was Blackhawk's expansion into more than a dozen new countries, including Australia, Canada, Cyprus, Kuban, 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's submit 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 for 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 2 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 are 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 recovery is difficult, and we do anticipate some choppiness. Regardless of how it plays out, we believe we're at 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 and 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?

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Kyle McClure, Frank's International N.V. - Senior VP, CFO & MD [4]

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Thanks, Mike. Let's go ahead and jump in the 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, one in Europe and Africa, will materialize, as well, I would offer that international offshore market's heading into 2019 are poised for a nice recovery, specifically in Africa, Europe and South America. We continue to see tendering activity built to a level we have not seen in many years in these 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 completion-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'll touch on in our Q4 guidance.

Turning to Slide 10, we'll 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 the decline in 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 5-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 sheets 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 9 months versus 2017. So even as sales have increased to 12% year-to-date versus 2017, we have been driving cost out and controlling any incremental needs to fund the business.

To close out [on my comments], I'll 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 increase 5% to 10% from the third quarter. The International segment is expected to see activity return closer to what we saw in Q2, with a 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 the 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 a 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 at least $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 quoting 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 bottom lapse 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 a 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 '19 being down from Q4 '18 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 projects out 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 will open the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a question from Ian MacPherson from Simmons.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [2]

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I wanted to ask one on Blackhawk. It seems like the international growth story there is clicking very well. How much of your 9 month -- first 9 months' revenues in Blackhawk this year are now from International?

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Scott A. McCurdy, Blackhawk Specialty Tools, LLC - President [3]

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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 9 months.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [4]

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

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Scott A. McCurdy, Blackhawk Specialty Tools, LLC - President [5]

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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.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [6]

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Got it. And I just wanted to ask about the revolver. Obviously, you've got some new cash in the balance sheet already, so maybe you can talk about your intentions or aspirations for that expanded liquidity and what you -- what types of things you might have in your crosshairs in terms of expanding the technology portfolio?

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Kyle McClure, Frank's International N.V. - Senior VP, CFO & MD [7]

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Yes, 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. Just a good practice financially for us. We've still got $250 million 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 a -- additional flexibility for us.

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Operator [8]

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(Operator Instructions) And we have a question from Brad Handler from Jeffries.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [9]

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If you could please just speak to the third quarter results in U.S. Services, maybe get another layer in, it was the 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 seem -- still seem like they were very strong.

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Kyle McClure, Frank's International N.V. - Senior VP, CFO & MD [10]

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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 at the quarter and got on a couple new rigs and more of a completion space work. There was also nice incremental margin flow-through. The other half of the coin here is really on the G&A side. This segment absorbs the large majority of our -- call it, $37.5 million in the quarter G&A sits 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.

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Steven J. Russell, Frank's International N.V. - President of Tubular Running Services [11]

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Yes. So I think, on U.S. Land, we've had some market share gains over the last few quarters and 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 to Scott's comments earlier, I would say, the Gulf is looking sort of flattish activity year-on-year. So I'd think we'd be more in a sort of a hold-and-sustain mode in the Gulf rather than continue growth going forward.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [12]

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Okay. That's fair enough. 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 that there can be a mix shift quarter-to-quarter in terms of how -- 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 that 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, are we doing like double-digit percentage kind of ships up and down? Or is it much more muted than that when we're talking about hold?

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Steven J. Russell, Frank's International N.V. - President of Tubular Running Services [13]

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Yes, 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 though, less than that, generally.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [14]

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Okay. All right. That's helpful. And can we assume that you're not suggesting there is -- some of the pricing gains you had -- if I shift to the U.S. Land side, some of the pricing gains you had, is there any reason to think that, that falls under pressure or that gets challenged as maybe competition tries to sort of clawback share, or any concerns you might have in terms of holding the pricing gains you've been able to realize here recently?

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Steven J. Russell, Frank's International N.V. - President of Tubular Running Services [15]

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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're adjust -- we'll adjust accordingly. But right now, we're not seeing that pressure at this point.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [16]

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Okay. That's helpful. And then I just want to make sure on the G&A progress. I've 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 our inferred G&A line in the fourth quarter and then on into 2019, correct?

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Kyle McClure, Frank's International N.V. - Senior VP, CFO & MD [17]

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Yes, 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 the folks with 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'd be professional services or headcount. So I think that would continue to be going down from this point would be our expectation.

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Operator [18]

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(Operator Instructions) And I have no further questions.

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Kyle McClure, Frank's International N.V. - Senior VP, CFO & MD [19]

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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.

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Operator [20]

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