Nuverra Environmental Solutions, Inc.
Q3 2019 Earnings Call Transcript

Published: 6 Nov 2019

[Operator:]

Good morning, and welcome to the Nuverra Environmental Solutions Third Quarter 2019 Earnings Call. This call is being recorded and will be available for the next 30 days on the company website at nuverra.com. At the end of our prepared remarks, we will have a question-and-answer session. [Operator Instructions]My name is Robert Kennedy, Vice President of Finance and Treasurer. Joining me today on the call are Charlie Thompson, Chairman and CEO; Robert Fox, Chief Operating Officer; and Stacy Hilgendorf, Chief Financial Officer.Today’s presentation will contain forward-looking statements about our expected financial results and operational performance. These statements involve risks and uncertainties that could cause actual results to differ from our expectations. Potential risk factors that could cause these differences are described in our SEC filings, which may be obtained by visiting the Investor Relations section of our website.All information provided on this call is as of today, November 6, 2019, 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. Reconciliations of our non-GAAP measures to the most closely related GAAP results can be found in the tables attached to our press release announcing financial results for the quarter.With that, I will turn the call over to Charlie.

[Charlie Thompson:]

Thanks, Robert. Welcome, everyone to Nuverra’s third quarter conference call. We’re starting to see the effects of the industry slowdown on the business. Operators in all our regions are scaling back their activity as a function of the year-end budget exhaustion and the demands placed on the public operating companies by the public company investor community. In the Rocky Mountain region, we’re seeing reduced completion activity from our customers, which has affected our trucking activity. We are also noticing greater price pressure from customers and aggressive bidding activity from our competitors, which is typical at this time in the cycle.Growing activity has also slowed in certain areas, which puts pressure on our landfill operation. In Haynesville, the lower gas prices are affecting activity as well, however, in the Northeast, with the lower level of completion activity, we are seeing increased volumes of water coming to disposal. Those increases started in the middle of September and have continued through early November. We are optimistic that, that trend will continue for the next few months, but appreciate operator preference for reuse that Stacy will talk about later on the call.We’re focused on many of the same initiatives we have started this year and are making additional changes on an ongoing basis. In the Rocky Mountain region, we are aggressively marketing our disposal capacity and adjusting our dispatch operations to improve customer satisfaction. In the Northeast, we’re focused on adjusting our trucking footprint to be more aligned geographically with our customers and their hauling needs, whether it be for reuse or for disposal. And throughout the regions, we are looking at ways to cut costs.We continue to maintain a healthy liquidity position, as Stacy will discuss, and increased scrutiny on capital expenditures. As an example of what we’re doing, we added in excess of 10 drivers early this quarter and an ongoing customer relationship without incurring any real costs. We are also looking at ways to increase disposal capacity in the Northeast as a means to serve new customer needs.Our outlook for the remainder of the year is for relatively stable volumes throughout the system, although we have to acknowledge visibility is limited. We’re doing everything we can to increase connectivity with customers throughout the organization, as we believe the safe and quality service we provide our customers will become increasingly important.Let me turn the call over to Stacy for some comments on the financial results.

[Stacy Hilgendorf:]

Thank you, Charlie. Good morning, everybody. I’ll walk thought several key financial metrics and provide some additional thoughts on our third quarter performance. Top line results were down 4.7% sequentially from the second quarter, primarily due to less completion activity in the Bakken, a drop-off in disposal volumes in the Haynesville in the Northeast and a reduction in new drilling activity near our North Dakota landfill. This was somewhat offset by stronger revenues from our lay flat temporary hose, equipment rental and roustabout businesses in the Rocky Mountain division as well as improved trucking activity in the Northeast.Comparing to year ago results, overall total revenue was $43.1 million in the third quarter of 2019, compared to $49.7 million in the third quarter of 2018, a decrease of 13.2%. This revenue decrease was mainly due to fewer freshwater and flowback jobs in our Bakken shale region, inconsistent customer activity in our Northeast trucking operations and stronger competition in our lay flat temporary hose business.We continue to focus on driving costs out of our business that don’t negatively impact customer service or safety. Overall, total cost as a percentage of revenues decreased 67 basis points this quarter compared to the same quarter last year. This improvement reflects our effort to focus on higher-margin services as well as creating trucking and disposal synergies that drive efficiencies for our customers.Revenue in our Rocky Mountain internal trucking operations were down 2.1% compared to the third quarter of 2018, and down 34.2% in our lower margins third-party trucking business, which typically handles the less predictable freshwater and flowback work. Revenues from our lay flat temporary hose business were off 46.5% in the same quarter last year as a result of increased competition, including some competitors who have more consistent access to water supplies.Our North Dakota landfill revenue was down 47.8% in the quarter year-over-year due to less drilling activity in the area. Partially offsetting these declines were increases in our Bakken equipment rental and disposal businesses, which were up 15.1% and 12.1%, respectively, from the same period in 2018. In the Northeast division, our fourth quarter 2018 acquisition of three new disposal wells drove third quarter year-over-year improvement of over 70% in our disposal well revenues, although trucking in the region declined 18.3% in the same period.The industry trend toward reuse of produced water in that region continues to put downward pressure on both trucking and disposal activities in the Northeast, but as fracking slowed down late in the third quarter, we have noticed a significant uptick in disposal volumes. In the Southern division, the reduction of volumes from a key pipeline customer continues to negatively impact year-over-year comparisons in that region, although the effect has been largely mitigated through efforts to more broadly market our trucking transfer stations to new customers and the expansion of volumes from existing customers.As noted last quarter, while this trade-off has caused some pricing pressure, the resulting diversification of our customer base has improved our credit risk concentration in that region. Revenue from water transfer activity in the Haynesville, which includes trucking and pipeline, is down 46.1% in the third quarter compared to the same quarter of 2018, however, disposal revenue is up 97.2% over the same period.Nuverra realized lower direct operating costs in the third quarter of 2019 compared with the same quarter of 2018 on a total dollar basis and as a percentage of revenues. This dollar basis decrease is primarily due to lower activity levels overall. However, the improvement, as a percentage of revenues, is a result of favorable service mix due to performing more higher-margin work and the active cost-reduction efforts during the past year that I mentioned previously.As a result, gross profit, excluding special items, which also excludes depreciation and impairment and other non-cash costs, increased as a percentage of revenues from 18.9% in the third quarter of 2018 to 20.2% in the third quarter of 2019.Driver hiring and retention continues to be crucial to the success of our business, and we will continue to focus resources on this in the coming quarters, including optimizing route planning to improve driver efficiency and changes to our recruiting strategy to ensure competitive compensation offerings.As of September 30, Nuverra had 343 drivers employed, which is up as compared to the end of last quarter, but down slightly from a year ago. G&A expense, excluding special items during the third quarter of 2019, was $4.4 million, a reduction of almost $1.2 million or 21.3% as compared to the same period in 2018.This reduction was primarily due to compensation costs and professional fees resulting from cost savings initiatives. G&A adjusted for special items is also down slightly versus the second quarter of 2019, an indication that our overhead reduction strategies are ongoing and sustainable. The company’s net loss for the third quarter of 2019 was $6.1 million as [indiscernible] $7.1 million in the same period of the prior year.When adjusted for special items, the net loss was $5.7 million in the third quarter of 2019 versus $7.4 million in the third quarter of 2018. The primary driver for the improvement was higher depreciation expense in 2018 due to fresh start accounting adjustments from our 2017 reorganization as well as the reduction in operating expenses in the current period that we discussed previously.Third quarter adjusted EBITDA was $4.6 million versus $3.9 million in the third quarter of 2018 and versus $5.3 million in the second quarter of 2019. The year-over-year improvement was primarily driven by the Clearwater acquisition, the realization of cost savings and the benefit of favorable product mix due to performing more higher-margin work. While the decrease from last quarter was driven by the effects of lower activity levels in trucking and disposal from a slowdown in completion activities as discussed previously.Looking at some other financial measures now. The company has continued its disciplined capital spending to support its refocused strategic plans. Cash paid for CapEx was $2.3 million in the third quarter compared to $1.4 million in the second quarter of 2019.Additionally, approximately $1.3 million of assets were acquired in the third quarter of 2019 through finance leases. The bulk of the capital expenditures were related to investments in our fleet. We expect to continue strategically investing in our core assets in the coming quarters.Total liquidity available for operating needs, capital spending and other purposes at September 30, 2019, was $19.9 million. This consisted of $14.2 million of cash and revolver availability and $5.7 million of delayed draw borrowing capacity under our second lien term loan.Interest expense for the third quarter of 2019 was $1.3 million as compared to $1.2 million in the same period a year ago. We ended the period with total debt of $36.9 million versus $37.1 million at the close of the second quarter of 2019. Included in this balance is approximately $5.8 million for finance leases for the acquisition of new heavy-duty trucks during this year.Our weighted average interest rate on our outstanding facilities was approximately 10%. Total debt to adjusted EBITDA for the last 12 months was 1.7 times when adjusted for acquisition and divestiture activity on a pro forma basis. We believe we can continue to grow the business and maintain low financial leverage. Third quarter days sales outstanding was 66 days, up nine days from last quarter, due primarily to timing issues with two larger customers.With Nuverra’s focus on strategic investment, customer service and safe and efficient operations, the company is well positioned to execute its strategy and take advantage of new opportunities throughout the remainder of 2019 and into the new year.We will now open the call for questions.

[Charlie Thompson:]

Okay. I don’t see any questions popping up on the screen. I’ll give everybody a minute to do the login that Robert talked about, to the extent there are any questions, otherwise some of you that have been on this call historically know where to track us down to answer any questions if we’re technologically challenged in working with this program to ask questions. It doesn’t seem like any pop up. I’ll end with one thing for the broader group.This will be Stacy Hilgendorf’s last call. He’s been with the company for six years, maybe a little longer. I’ve had the pleasure of working with him for my almost two years associated with the company. He’s done a great job, stepped up where he’s needed to and has found something that will be an attractive opportunity for him in the long term. So I just wanted to end the call saying thank you for service and wish them well in his new adventures. I still don’t see any questions. So we’ll end the call here. But feel free to track me down with any questions anybody has. Thanks very much for your time.

[Operator:]

Good bye.