Nuverra Environmental Solutions, Inc.
Q2 2018 Earnings Call Transcript

Published: 7 Aug 2018

[Operator:]

Good morning and welcome to the Nuverra Environmental Solutions Second Quarter Earnings Call. This call is being recorded and will be available for the next 30 days on the Company website at nuverra.com. I would like to turn the call over to Robert Kennedy, Vice President, Finance and Treasurer. Robert, please go ahead.

[Robert Kennedy:]

Good morning, joining me on the call today are Charley Thompson, Chairman and Interim CEO, Robert Fox, Chief Operating Officer, Ed Lang, CFO; and Stacy Hilgendorf, Controller and Chief Accounting 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, August 7, 2018 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 turn the call over to Charley.

[Charley Thompson:]

Thank you, Robert. Good morning everyone. Nuverra continues to improve its financial performance as we build our management team and invest in our business platforms. We recently hired Robert Fox as President and Chief Operating Officer. Robert has over 25 years of experience in the trucking industry. The strong background in logistics, fleet management and finance made him an ideal candidate for this position. Robert has been spending meaningful time in each region and is focused on our processes, logistics profitability and people. I am encouraged by what he has identified in a brief period of time he has been with us. He is focused on among other things recruiting drivers, and overseeing the implementation of our transaction logistics. We continue to see a healthy industry backdrop for most of our businesses. Pricing is improving gradually and volumes in most regions are improving. In the Bakken, we see increased demand for trucking, slightly offset by driver attrition, a stable rental business, improved volumes in our saltwater disposal and landfill lines of business and strong results in the water transfer division although that’s a lumpy revenue stream. In the Haynesville, we have seen a reduction in pipeline volumes that are – that we are actively seeking to replace and very competitive pricing in the SWD business. In the Northeast, we see improved activity and are upgrading our fleet to have more optimally designed equipment. We have placed orders for new trucks for the first time in several years and expect to be running this new equipment before the end of the year. This new equipment will significantly improve driver productivity and reduce repair and maintenance expenses. On the capital expenditure front, we have made some improvements to our SWD network to increase capacity and the capital we spent earlier in the year on the water transfer business has produced excellent results. We are regularly reviewing numerous other capital projects. Now I would like to discuss some of our second quarter performance highlights before turning the call over to Ed for the financial review. Revenue was approximately $49 million, this was an 18% improvement versus 2017. When adjusted for the exit from the Eagle Ford Basin, our second quarter revenue grew by 26%. Adjusted EBITDA almost doubled compared to the same time period in 2017. Total debt including leases was $36.6 million, which is the lowest level since the reorganization. Nuverra has total availability of almost $31 million comprised of cash from asset sales and excess capacity in our credit facility. At quarter end, we had no borrowings outstanding under our short-term liquidity facility. Finally, we made some staff reductions throughout the quarter to continue our effort to right size the business. I am encouraged by the progress that Nuverra has made in 2018. We are maintaining our commitment to profitable revenue growth, margin improvement and return on invested capital throughout our operations. Now, I will turn the call over to Ed for a more detailed financial review.

[Edward Lang:]

Thank you, Charley. Good morning everyone. I’d like to walk through several key metrics and provide some additional thoughts on our second quarter performance. Nuverra has continued to realize strong organic revenue growth and EBITDA improvement in 2018. Activity levels in all our regions are increasing and pricing continues to improve from last year. Similar to our previous calls and SEC filings, we have included references distinguishing the predecessor and successor periods which relate to the reporting periods prior to and subsequent to our reorganization. Those references are included in order to comply with GAAP guidance. Total revenue was $48.9 million in the second quarter, compared to $41.5 million in the same period a year ago, an increase of nearly 18%. Our revenue growth was comprised of 3% from price improvements and 23% due to volume increases offset by a 9% decrease due to the exit of the Eagle Ford Shale area. These areas – the areas where we experienced the greatest price improvement were the northeast and Bakken Trucking operations. Volume improvement was led by our fresh water transfer business in the Bakken and production water disposal in all basins. This positive growth reflects the momentum throughout the E&P industry. Rig counts were up 22% over the past year in the basins we operate and oil prices are up 42% from the same time period last year. In addition, the number of wells completed in the basins we operate have increased by 22%, which indicates continued growth in production activity. Nuverra did experienced higher operating cost in the second quarter due primarily to the increase in business activity in all basins, along with increased reliance on higher cost third-party or sub-contracted truck drivers as a result of difficulties in recruiting and retaining enough full-time drivers to satisfy customer demand in the Bakken region. Despite the additional cost of subcontracted truck drivers, direct operating cost in the quarter increased at a slower pace than revenues, primarily due to price increases, and growth in higher margin businesses like saltwater disposal and water transfer. As a result, gross profit, which excludes depreciation and impairment and other non-cash costs improved by 36% from $7.1 million in the second quarter of 2017 to $9.6 million in the second quarter of 2018. As previously mentioned, one of the biggest challenges of managing our trucking business is the ability to recruit and retain drivers. As of June 30, 2018, Nuverra had 324 drivers employed, which is down from 349 drivers last year. We are actively seeking additional drivers which are needed due to the increased service demand in the energy industry. G&A decreased in the second quarter as compared to the same time period in 2017, due primarily to the absence of debt restructuring costs in 2018. The company’s net loss for the second quarter of 2018 was $11.2 million, as compared to $19.6 million last year. The primary driver for the improvement was growth in revenue, reduction in G&A and interest expense, partially offset by one-time costs related to the closure of our Eagle Ford operations. Second quarter adjusted EBITDA was $4.1 million versus $2.1 million in 2017. Adjusted EBITDA margin improved by 340 basis points. Turning now to other financial measures. The company has increased capital spending to support the strengthening marketplace. Spending was $3.7 million in the second quarter compared to $1.3 million in 2017. The bulk of the capital expenditures were related to building out our water transfer business in the Bakken and investment in our fleet. The increased purchasing was financed by the sale of underutilized assets for $5.8 million in the second quarter of 2018. Nuverra has liquidity available to invest in high return opportunities in order to improve its market leadership position. We expect a higher level of capital spending in the second half of 2018 to meet increased service demands of our customers. Nuverra dramatically improved its liquidity position as a result of the reorganization. Total liquidity available for capital spending and other purposes at June 30, 2018 was $30.8 million. This consisted of $12.8 million of cash and $18 million of availability from our credit facilities. Interest expense for the second quarter of 2018 was $1.2 million as compared to $5.3 million in the same period a year ago. This was driven by the reduction of our outstanding debt balance through the reorganization. We ended the period with total debt of $36.6 million versus $504.7 million at the close of the second quarter of 2017. Our weighted average interest rate on successor facilities was 9.9%. Total debt to adjusted EBITDA for the last twelve months was 1.98 times. We believe we can continue to grow the business and maintain low financial leverage. Second quarter days sales outstanding was 60 days, down two days year-over-year and down five days from Q1 of 2018 based on improved collection efforts. Each day of DSO is equal to over $500,000 of free cash flow. Finally, I would like to draw your attention to our safety performance during the second quarter. TRIR which stands for Total Recordable Incidence Rate and is a common benchmark in the industry to measure injury prevention performance increased by 0.19 year-over-year through Q2 2018 to 0.96. 2017 marked our best year of safety performance with a full year TRIR of 0.96 and we are pleased, we are on track for another solid year of safety performance. Providing a safe work environment for employees, customers and all stakeholders is our highest priority and vital to our long-term success. With Nuverra's focus on safety, operating leverage, and strong industry fundamentals, the company is well positioned to further improve financial performance in 2018. Gail, we will now open it up for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is coming from Hamzah Mazari from Macquarie. Please go ahead. Your line is open. Hamzah Mazari your line is now open.

[Kayvon Rahbar:]

Hi, this is Kayvon Rahbar on for Hamzah Mazari. I had a couple questions for Robert. Robert, if you could – you’ve been on the board now for a couple months. What are your initial thoughts on the state of Nuverra’s business?

[Robert Fox:]

Well, as Charley indicated, I have been out and around met with a lot of our operational and sales employees, met with a lot of drivers at all of our different locations. A few things that have kind of struck me is unique to this business, we are partnered with really good customers. And they are willing to pay for good service but they are not willing to pay for inefficiencies. The day this industry paying for inefficient operations or a lot of downtime waiting time, that’s over. So, it’s up to us to improve business practices, maximize our yield and eliminate inefficiencies. I’ve looked at a lot of our equipment. It’s not the newest fleet in the world, but it’s well-maintained and I think during the downturn, we probably didn’t generate a lot of miles. So, our fleet is in pretty good shape, particularly given the age. We really have a lot of talented and hard working employees. I didn’t really impressed. These people know how to do their jobs and they could grow into other areas of capable doing a lot more even than they are doing now. We definitely won’t be disadvantaged by the skill level of this workforce. However, we do operate in some areas where the cost of living is very high and there is a lot of demand for employees. We can’t afford to be inefficient with our G&A, staffing. There is just some areas that we operate in that the wages are too high that’s so people at a problem and so, again, we’ve got to improve our business processes and our systems. Our systems, they are either great where they are completely manual and there is not a lot of in between and to the extent that we have developed computerized systems, they are fantastic. I mean, they look like they were developed by a much larger company. Things that we are doing in safety, in pipeline monitoring and some of the ERP reporting and some of the standalone businesses like the rental operation are just excellent and we have a lot of stuff we are working on now in terms of systems that will come online later this year and really will help transform the business. I guess, the last thing I had, there is a few things as I went around, that just required immediate attention and action, one of those things that would be truck driver recruiting. We were working hard that really not making a lot of progress, kind of holding to serve with where were more or less at the beginning of the year in terms of staffed trucks. But we kind of had an outdated hiring methodology and ideas. So we went through and overhauled that and with the changes that we made towards the end of the second quarter, we’ve already seeing some improving numbers in our staffing. In July, we’ve already been able to add a pretty meaningful number of drivers that are on the road right now just to changing a few things on how and where we recruit. And that’s kind of…

[Kayvon Rahbar:]

I think drive up…

[Robert Fox:]

Sorry.

[Kayvon Rahbar:]

All right. I appreciate that. You mentioned some things require immediate attention. Would you say those are your great parties over the next six to 12 months or is it some other things?

[Robert Fox:]

Well, at all times and what’s the most important financially, yes, in our world, every unstaffed truck that we find a driver and becomes productive that’s about a $100,000, he would down the way pick up on that activity. So, things like that jump up to the top of the list. What we are really working on for the balance of the year, we’ve got to get these systems implemented to be able to generate the efficiencies we made to provide more usable KPIs to help us improve our business processes, be able to handle more volume without increasing our G&A. Historically, our G&A has been higher probably than this type of business can support. But it was really more due to the lack of systems and manual processes that made it just inefficient and more expensive to administer. So, the things that we have going right now in terms of systems implementation also is right at the top and that will be good long-term investment for the business. One of the things we work on every day now is putting the right truck on the right load as Charley talked about we are adding some new trucks into the fleet and we’ve started with the northeast. One of the things we’ve done is a very modest CapEx project where we’ll put an extra axel on the trucks. So it will be able to scale more – a heavier load and each time we do that, we are improving the productive capacity of those older trucks by at least 15%. So if you think about the multiple loads that we do every day, that’s every truck that gets retrofitted with that betterment. One more axel adds about another $50,000 of EBITDA per year for that one truck. So, that’s a project we are doing now. It has a quick, probably six month payback or less. And so, we are going through that. The new equipment is the same kind of deal, just more and plus you get the repairs and maintenance and fuel efficiency. So, as we go through and take and expand our production capacity by putting really the perfect truck on the job, that’s probably the most impactful thing we can do right now in terms of capital spending. We really started to look at the customer base and what we are doing with the routes that we are running to try to optimize what we are doing, we’ve looked at a activity-based costing model that really takes a look down to per lane or per load basis and trying to focus on another stand exactly what business that we are – what were the most profitable and what we are doing that’s not compensatory and so we are looking at that every day. One of the things that for a company that’s evolved a fleet of trucks, we don’t do a great job on fuel management right now, we are working on that. We are working on getting a better deal with our fuel suppliers like our truck stops, focused fuel purchasing. So one or two big stops versus a bunch of kind of mom and pops and then, same thing with monitoring the fuel efficiency, we are doing more to understand our miles per gallon and try to improve that. And then, really the last thing that we are evaluating that, right now, we do a lot with third-party trucking companies and independent contractors. It’s actually, really nice asset light business model that should work well for the company. That will be something that we’ll focus on in the future. We need to understand the economics of what we are getting right now in terms of yield and what we can do with that in terms of the computer systems and business practices that we have today. So, we are working on that slow and steady kind of tapping the brights on that until we understand completely what we have. But developing something where we have a flexible fleet of non-asset-based capacity and that if there is a surge in business that we can take add to that without having to expend CapEx dollars if there is a slowdown, that would be the first place we cutback. So, that incremental business is something that we are really focused on trying to understand better and maximize.

[Kayvon Rahbar:]

Well, thanks, Robert. I appreciate the color.

[Robert Fox:]

Yes, you are welcome.

[Kayvon Rahbar:]

Our next question is coming from Michael Hoffman from Stifel. Please go ahead. Your line is open.

[Michael Hoffman:]

Thank you, Charley, Ed, Robert for taking the questions. Robert, appreciate the candor and I hope you continue to be candid, because, but it does open up lots of incremental questions. So, KPI, key performance indicators, what are you measuring? What does matter?

[Robert Fox:]

Well, probably t he biggest single thing is revenue per truck per week or per day. That is really the, what we look at in terms of – as a business productive or not the per hour rate that we charge is important. As I indicated from an operating standpoint, the variable cost like the fuel and the miles per gallon are critically important. We are doing a little bit better job of understanding the maintenance side of it and the maintenance per hour. And then from – and Ed ended, appropriately ended his comments with the safety side of it. We can’t afford to have over-the-road claims and workers comp claims. So, the safety side of it is critical for the company to be successful. So, it’s all the safety measures.

[Michael Hoffman:]

Okay. On recruiting, in the prior peak and troughs of the shale revolution, housing was a critical issue, as well and is that no longer an issue, or is it an issue? How does that factor into the recruiting process?

[Robert Fox:]

Well, it’s out there to some degree. It’s not – it’s something you compete with to some degree. But it’s really not like it was before. Actually, the housing and some of these areas are overbuilt and there is vacancies. So, it’s part of the package that you also have benefits in the rate of pay and it kind of gets normalized out as you take a look at every offering. Some companies might offer housing, but almost that will benefit other companies like us don’t offer the housing, but have a good rate of pay and a lot better benefit programs.

[Charley Thompson:]

Michael, it’s Charley. So, if you would look at our regions, we don’t – the housing issue isn’t a consideration in the South Forest and the Haynesville isn’t a consideration for us really in the northeast, it’s only a consideration in the Bakken. And we do still face – I agree with what Robert says, but we do still face competitors that could be midstream companies who were taking some of our drivers, as well as other trucking companies, some of whom are offering housing allowances. We will look at - I am actually in North Dakota. We were meeting with a bunch of drivers and internal people in one of our locations last night. And kind of the combination of quality of equipment, we are a commission-based operation in the Bakken. The commission rate, the benefits and things like housing allowance, we look at that every day to do what we can to make sure that we offer a competitive package to the drivers that we have and the drivers that we are trying to recruit. It’s a relatively complicated algorithm, because there is a mix of different ages. Some of the drivers want healthcare, some of them don’t care about healthcare, some of them only want what’s the maximum amount that shows up in their pay stub when they get it. So, it’s something we look at all the time. We recently made some adjustments in not in housing allowance, but in how we pay drivers both in the Northeast and in the Bakken to try to make ourselves more competitive with the rest of the companies in the business.

[Michael Hoffman:]

Okay. Ed, on free cash flow, at what point do you see the business turning positive, I calculated at the old fashion, why cash flow from ops less all capital spending and you alluded that you may be spending more money. What’s the full year budget now for 2018 for CapEx?

[Edward Lang:]

But we haven’t publicly announced what I would say, CapEx this year probably will be in a range of, say, $15 million to $20 million with a good portion of that as we’ve discussed related to fleet enhancement and just trying to giving the production backlog, those deliveries will start here in the latter part of 2018 and might roll into 2019. But that has – it’s only related to the manufacturing backlog that you see with heavy vehicles. As far as free cash flow, a lot of this investment in the fleet is actually – is being funded by kind of going through the asset base and whether it was all other trucks or even real property, but really, kind of getting the right asset mix. So, we’ve been thoroughly active in asset sales since the end of 2017 and continue to look at what is the right capital base for the company. And so, really most of the capital spending this year will be funded by asset sales, which has allowed us then also to kind of delever the company a little bit. So, I think, we are well on our way to being cash flow positive on an ongoing basis.

[Michael Hoffman:]

Okay. Well then, let me lead back to capital spending. What’s the baseline capital spending, ex the growth spending?

[Edward Lang:]

Well, it’s a little bit of a moving target based on the projects that we have in front of us. Essentially, I would tell you that, if you look at the useful life of the type of vehicles or heavy vehicles we use, they probably have a useful life of maybe up to seven years. So, if you kind of do the back of the envelope on the math, we should be replacing about 15% of the fleet every year. We’ve gotten that going this year. We will continue for the next several years going forward, as Robert Fox mentioned, we are particularly focused on the fleet requirements in our Northeastern operations and that’s where a larger portion of the fleet spend will occur. But essentially, across the board, about 15% of the fleet needs to be replaced every year.

[Michael Hoffman:]

Okay. Well, and you’ve given us a table that shows you 470 trucks, so that’s sort of 70 trucks a year at 200 grand a truck?

[Edward Lang:]

Approximately.

[Michael Hoffman:]

Okay. All right. That helps. And then, on the asset utilization table that you did gave, that was a great table. Can you at least share us some of the directional trends of what you’ve seen year-over-year versus Q-on-Q? It’s like the second or last page you gave this whole tables.

[Edward Lang:]

No, I would say, generally, we continue to see improved utilization. Now, the other thing is, we probably are still looking at what the fleet requirements are going forward. So we actually might shrink the fleet a little bit. Keep in mind, with some of the changes in the business, some of the use of third-party drivers, we are still right sizing the fleet as we modernize it at the same time. So – but we do have some flexibility, meaning as we do see increased volume growth. As you mentioned, there is some excess capacity, both in the fleet, the pipeline in the south and that really the biggest challenge for us is recruiting new drivers. Now, we have seen some – as Robert Fox had mentioned, we have seen some improvement in that, particularly in the northeast. We are starting to see a net gain in the number of drivers and really are focused now on driver recruiting is to bring up the number of drivers in the Bakken. But, I think we are comfortable with the number of trucks. What we want to do is, continue to modernize the fleet and which will then also reduce the R&M expense going forward.

[Michael Hoffman:]

Okay. You alluded to in the opening remarks that at the Haynesville, the pipeline volumes are down in the SWD pricing. What’s going on it’s down? What’s happening in the Haynesville that that’s occurred?

[Charley Thompson:]

The - go ahead Ed.

[Edward Lang:]

Go ahead, Charley.

[Charley Thompson:]

All right. The – so, the Haynesville pipeline, we have a couple of customers who are operators and like you see in other basins operators are building their own – or drilling their own saltwater disposal wells. So, we have some – I would say, competitive dynamic is cautioning a reduction. We haven’t lost any big customer or anything like that. It’s just a competitive market down there. There are some entrants in the space who are trying to make a name for themselves and they are charging low rates for trucking and low rates for disposal. The disposal wells down there are higher capacity. So, it’s just – I mean, the honest answer is, it’s a rock fight down there. We try to keep volumes up flowing through the pipeline. I would say, we are - in terms of one of the earlier questions, I think that came from Kayvon, with respect to priorities, one of the top priorities for the guy that runs our business development efforts is to increase volumes through the pipeline and into the saltwater disposal network there. And I think we are guardedly optimistic based on a lot of the work that I’ve seen in the three or four names out that are active in and around our pipe who were looking to us for additional capacity.

[Michael Hoffman:]

Okay. And then, with regards to the Bakken, at the current sort of trend of $65 to $75 a barrel, is that good enough to sustain actual growth in drilling and completion? Or are we hitting a leveling-off point?

[Charley Thompson:]

I think it’s good enough to sustain a slight increase. I wouldn’t say it’s rocking and rolling, but when we monitor and talk to all of the operators that we do business with and trying to anticipate where we are next going to be doing business and who we are next going to be providing services to, either existing or new customers. I think the general level of activity is pretty high and I think at those kind of prices, the economics for the basin are pretty good, I think it’s cored up and the fringes of it are seeing less activity than they did historically. But I think there is plenty of activity in and around the core areas. As every week that I hear of, hey, we need to get ready to spool up for so and so, because they are going to be drilling more wells. So, I would say, it’s a healthy, but not booming kind of backdrop from the standpoint of pricing and overall basin economics.

[Michael Hoffman:]

Okay. And the last question for me, systems, Robert alluded to some are good, some are tearable or manual. I am assuming financial is great and this is more a business operating systems. It was like getting it to an electronic manifest instead of having to find somebody and get a signature, things like that?

[Charley Thompson:]

That’s, well, that’s probably the – a incredibly time consuming. We are a very transactional business, right. Lots and lots of loads every day, every region. I think the systems involved in terms of – from the time at which the work is done, to the time in which the invoice is distributed to the time that we get collection is still a very manual process for us. We are in the final stages of implementing some technology that many of our competitors have that are going to remove some of the duplicative steps and manual steps that we find in that process. So, that’s in terms of things in the top five of the list of what we are doing, that’s going to help us operationally. It’s going to help us with customers. It’s going to help our working capital and it’s going to help our reporting and going to allow Robert to do some of the things that he is focused on with respect to profitability routes and individual trucks across each of the basins.

[Robert Fox:]

Yes, where we are challenged on some of the systems really, is at the front-end of the transactions with dispatch and load planning, the financial systems of the business and the reporting, that’s excellent. The information that Robert Kennedy and Stacy and Ed put out, the metrics are great. I agree those things, just almost like reading a box score in the sports page. They do a fantastic job on the back-end of kind of more aligning the financial and operating results.

[Michael Hoffman:]

Last question if I could one more. Where – I was with the industry when we went through the recession and share of marketplace where this achieve a fair amount of consolidation and it didn’t really happen, and it just sort of surprised me. What’s the prospect that some of these desperate players all figure out that maybe they are all better together at a critical mass than a lot of little players running around beating each other up. What’s the likelihood of that happening? And I guess, the follow-on to that is, are you the shark or the minnow?

[Charley Thompson:]

That’s a good last question, Michael. There is - it’s absolutely true – I’ve been around the business for a long time and everybody always says, there should be lot of consolidation and there isn’t always. It’s very selective in the oil service business. I think you have a couple of things going on. Number one, the backdrop of a healthy industry conditions with what you know to be in excess of amount of capital out there is, breeding some new entrants in some of the markets in which we are operating. So people that are getting their hands on some capital are being very competitive. And perpetuating the industry phenomenon of the number of players beating each other’s brains out. We’ll never like to see that, but that’s a reality of the market that we are in with the capital that’s out there from private equity et cetera. At the same time, there are an awful lot of orphaned, neglected, that I mean poorly operating, but just companies out there that a sub-optimal from a scale standpoint that are looking to do something. I think our outlook on things is, to the extent we can continue effecting what it is, we’ve been trying to do over the last five months and optimized the assets we have. We’d probably like to be the shark rather than the minnow.

[Michael Hoffman:]

Okay, cool. Thanks for taking my questions.

[Charley Thompson:]

Sure. Thanks, Michael.

[Operator:]

That concludes today's question-and-answer session. I would like now to turn the call back to Mr. Lang, for any additional or closing remarks.

[Edward Lang:]

Thanks, Gail. First, I would like to thank all of our employees for their commitment to safety, customer service and operational excellence. Their performance is the reason for our success here in the second quarter. Thank all you who dialed in to listen today. And we look forward to meeting you and talking to you in the future and have a good day. Thank you.

[Operator:]

Ladies and gentlemen, that concludes today's conference call. Thank you very much for your participation. You may now disconnect.