Cypress Environmental Partners, L.P.
Q4 2018 Earnings Call Transcript

Published: 18 Mar 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Cypress Energy Partners Fourth Quarter Earnings Release Conference Call. As a reminder today's meeting has been recorded. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. [Operator Instructions] And now, let's get started with opening remarks and introduction. I'm pleased to turn the floor to Mr. Richard Carson. Mr. Carson, the floor is yours, sir.

[Richard Carson:]

Thank you. Hello, and welcome to the Cypress Energy Partners Fourth Quarter 2018 Investor Conference Call. I am Richard Carson, the Senior Vice President and General Counsel. With us today are Pete Boylan, our Chairman and CEO; and Jeff Herbers, our Vice President and Chief Financial Officer. We released our fourth quarter 2018 financial results and posted the press release on our website, cypressenergy.com, earlier today. In the press release, you will find an important disclaimer regarding forward-looking statements. This disclaimer is an essential component of our remarks and it is important that you review it. Also included in the press release are various non-GAAP measures that we have reconciled to financial measures under generally accepted accounting principles. Those reconciliations appear toward the end of the press release. With that, I will turn the call over to Pete.

[Pete Boylan:]

Thank you, Richard, and good morning. I appreciate you joining us today and thank you for your continued interest in our company. I am proud of our team and very pleased with our operating results during the fourth quarter, which historically is seasonally lower as a result of the holidays and weather conditions. All three of our segments generated increased revenues in the fourth quarter of 2018 relative to the fourth quarter of 2017, with strong gross margins which reflect not only the diversity and strength of our customers, but the need for the services we offer. Our 2018 performance was very strong across the board, and we successfully deleverage the Company, reducing our net debt by 46% with additional equity that materially strengthened our balance sheet. Revenue of our Pipeline Inspection segment increased 63.6 million in the fourth quarter of '17 to 82.2 million in the fourth quarter of '18, an increase of 29%. Gross margins in the segment increased from 7 million in '17 to 9 million in '18, an increase of 28%. We continue to make progress on our goal of diversifying our revenues into higher margin, inspection and integrity services. We finished '18 with strong headcount, our weekly headcount average 1,375 inspectors in the fourth quarter of '18, compared to 1,101 in the fourth quarter of '17 or 25% increase. During the fourth quarter of '18, we began work on the largest contract award in our history, a pipeline project that we announced last quarter that is expected to continue throughout this year. Revenues of our Pipeline & Process Services otherwise referred to as PPS segment increased 11%. The increase was due in part to increasing demand and in part to improve business development efforts. Gross margins increased 25%. We began 2019 with a solid project backlog and have recently experienced robust bidding activity on new projects. The extensive rain in the first quarter of 2019 has led to delays in the start dates of several of these projects we've been awarded. Revenues in our Water Services segment during the quarter increased 24%, partially driven by the completion with some new pipelines attached to our facilities earlier in the year. Demand for this segment increased in 2018 as customer activity increased in the Bakken shale region with the higher commodity prices. Gross margins in this segment increased 77%. These increases occurred despite the fact that we sold our two saltwater disposal facilities in Texas in the Permian Basin during January of '18 and May of '18, respectively on attractive terms effectively exiting our saltwater disposal presence in the Permian Basin. Our sponsor, Cypress Energy Holdings, completed two acquisitions in the third quarter of 2018 with the intention of offering these businesses to the Partnership, when appropriate. These are the first acquisitions we've made since the second quarter of 2015. We believe this will allow us to expand the breadth and depth of our pipeline integrity services we offer our clients. Both transactions were asset purchases that require some repositioning before bringing them into the partnership. Our sponsor has made solid progress on both acquisitions related to goal and intends to offer them to the partnership once it is accomplished certain developmental goals, most likely in early 2020, if not sooner. These acquisitions would move us into several new lines of work including various Pipeline & Process or PPS services including chemical cleaning, pumping, flushing, water treatment, in-line inspection otherwise known as ILI, with next-generation high-resolution technology for energy companies, equipment rental which can be converted into a service business before offering this line of business in partnership and other PPS services including nitrogen and dehydration. Our new Lafayette regional facility also allows us to expand into the offshore market which we've never served before, and positions us to better serve the southeastern part of the country with all of our inspection and integrity services. Our new MFL, ILI technology, magnetic flux leakage detection, and ILI against transfer in-line inspection otherwise known as smart pigging is also the first high-definition tool capable of serving the municipal water industry's aging borderlines deal pipelines that are used to transport our drinking water throughout this country and most of the world. Most of the water lines in this country are very old and need a substantial maintenance, repair and replacement. The acquisition of these businesses by the partnership also positioned us to eventually resume increasing our distributions. In all of our business segments, we continue to invest in talent, technology and capabilities that we believe will drive organic growth, expand the number of customers we serve, increase margins and most importantly deliver attractive returns on capital invested. Despite a decline in crude oil prices in the fourth quarter of '18, the outlook for global supply and demand dynamics remain solid. We also remain confident that Cypress has a winning strategy and provide essential services required by our customers to deliver attractive long-term growth. We now have a very solid balance sheet with modest leverage of 2.6 times adjusted EBITDA net debt. And with these two potential strategic dropdown opportunities, we have additional opportunities to enhance organic growth. We remain a leader in North America in the Inspection and Integrity industry, and we continue to grow the breadth and depth of our service offerings. We believe this industry is poised for attractive long-term growth given the aging energy infrastructure in North America as well as new construction that requires our essential midstream services. I'm also excited to have the opportunity to serve the large municipal water industry with our inspection services. The ILI services for the municipal water industry are not MLP eligible qualifying income and we will be required to pay taxes on these activities. [Technical Difficulty] [0

[Jeff Herbers:]

Thank you, Pete. As Richard mentioned in addition to the GAAP financial metrics that we will talk about this morning, our remarks will also include non-GAAP financial information that we believe enhances our investors understanding of our performance. These non-GAAP financial metrics are reconciled to GAAP financial information in our press release. Revenues in the fourth quarter were 88.9 million, an increase of 19.5 million or 28% over the same period last year. Revenues for the year were 315 million, an increase of 28.6 million or 10% over the prior year. Our net income in the fourth quarter of 2018 was 2.6 million compared to net income of 1.9 million in the fourth quarter of 2017, an increase of nearly 36%. Of this net income, 1.6 million was attributable to our common unitholders and 1 million was attributable to our preferred unitholder. Net income for the year was 12.1 million, an increase of 14 million over the prior year. Net income attributable to our common unitholders for the year totaled 9 million, compared to 3.2 million in the prior year, an increase of 177%. In 2017, net income attributable to our common unitholders included 4.1 million sponsor support provided to us for no additional consideration. Adjusted EBITDA for the fourth quarter of 2018 was 6.3 million, compared to 4.5 million in the same period of 2017, an increase of 1.8 million or 40%. Adjusted EBITDA for the year was 23.1 million, compared to 16.6 million in the same period of 2017, an increase of 6.5 million or 39%. Adjusted EBITDA for the 2017 year included 1.8 million of sponsor support. Exclusive of this sponsor support in 2017, our EBITDA in 2018 increased 55% over 2017. Adjusted EBITDA attributable to our limited partners for the fourth quarter of 2018 was 6.2 million, compared to 5.5 million in the same period in 2017, an increase of 13% although the 2017 amount included 1.3 million of sponsor support. Exclusive of this sponsor support, adjusted EBITDA attributable to our limited partners increased by 48% in the fourth quarter of 2018 compared to the fourth quarter of 2017. Adjusted EBITDA attributable to the non-controlling interest owners that own 49% of our hydrostatic testing subsidiary was 0.1 million for the fourth quarter of 2018. Adjusted EBITDA attributable to our limited partners for the 2018 year was 21.9 million, compared to 18.7 million in the prior year, an increase of 3.2 million or 17%. The 2017 adjusted EBITDA attributable to our limited partners, [Technical Difficulty] [0

[Pete Boylan:]

Thanks Jeff. We apologize again for the technical difficulties. I'm not sure what occurred, you'd like think something like that happens with bad news, not a good. But after several difficult years during the industry downturn, as I said earlier, I'm very proud of our team for their dedication, hard work and perseverance. We're pleased to report this improved operating inside of results for both the fourth quarter and the full-year of 2018. We remain optimistic as we look to the future on the substantial organic growth opportunities. We have to expand our customer base along with the potential dropdowns of our two acquisitions that will add offshore nitrogen rentals, ILI services to our growing portfolio of services. I've recently hired a new Houston-based VP of Business Development that will report directly to me. Our organic growth opportunities are significant and continue to be our biggest opportunity and that we only serve less than 10% of the potential available customers, they can utilize one or more of our services. Our 2018 results were excellent with revenue growth of 10%, operational adjusted EBITDA growth excluding sponsor support of greater than 55%, and DCF growth excluding sponsor support of over a 115%. Those are the measures I really pay attention to and we're proud of the results. PG&E remains an important customer and we continue to work with them though their unfortunate bankruptcy filing as a result of the wildfires in Northern California associated with their electrical system. We appreciate the investment of your valuable time in joining this call and your continued interest in our partnership. Although, I'm pleased with our fourth quarter results and the trends in our business, we will continue to strive for profitable growth, safety and operational excellence which should enable us to effectively and efficiently grow the partnership while maintaining a disciplined focus on long-term unitholder value, and ensuring that we have attractive returns on our capital invested. Operator, we may now being to take some questions.

[Richard Carson:]

Okay, operator, thank you. It doesn’t appear that we've got any questions this morning. Thanks again for your time everybody, so long.

[Operator:]

Ladies and gentlemen, this does conclude today's conference and we do thank you all for your participation. You may now disconnect and we hope that you enjoy the rest of your day.