Hunting PLC (HTG) Earnings Call Transcript & Summary

Good afternoon to you all. I would like to welcome you to the 2021 Annual General Meeting of Hunting PLC, and I declare the meeting open. My name is Jay Glick, and I'm the Non-Executive Chairman of Hunting. As announced on the 18th of March when we published our 2020 annual report and accounts, the Board has taken the decision to hold this year's AGM as a closed meeting because despite lockdown measures being partially lifted in the U.K., the risk of infection due to COVID-19 still remains. Please go to Slide 1. The agenda for today's meeting is on our first slide. After my introduction, I will pass the meeting to Jim Johnson, our Chief Executive. Jim will provide an overview of the 2020 year and an update on our quarter 1 trading, which was announced this morning to the London Stock Exchange. In advance of this meeting, shareholders were invited to submit questions in writing. Answers to those questions have been published on the company's website and will be addressed after Jim's presentation. We will continue to take questions from shareholders during the AGM. These can be submitted to the e-mail address [email protected]. That's shown on the bottom of most of the slides, if you need to refer to it. Following the question-and-answer session, we'll move into the main business of the AGM, which will include a poll. The poll will close at the conclusion of the meeting. After the AGM, a recording of the meeting will be made available to -- on the company's website. Please go to Slide 2. This slide presents the Hunting PLC Board. Bruce Ferguson, our Finance Director; and Ben Willey, our company Secretary, are at our Hanover Square offices in London and will comprise the quorum of the meeting. Our other directors who are joining the meeting by telephone are Jim Johnson, Annell Bay and myself and Carol Chesney, Keith Lough and Richard Hunting in the U.K. As everyone is aware, 2020 has been a highly challenging year for the company, and I would like to thank my fellow directors, and in particular, Jim and Bruce, for their leadership and counsel during the year. Move please to Slide 3 and then on to 4. So as we turn to 2020, in March of last year, the company -- the global energy industry was faced with a price war that led to overproduction with the OPEC+ group, and that had a negative impact on oil prices. This was rapidly followed by the global lockdown measures that were put in place to curtail the spread of COVID-19, which further depressed the demand for oil and adversely affected oil prices. No one could have predicted the huge impact the virus would have on global economies. Hunting was not unaffected by this market shock, and this is reflected in our financial results. I'm pleased to report that Hunting's leadership team continued to execute key strategic initiatives despite the market backdrop and were decisive interactions to address COVID-19. As we will note later, our health and safety performance has been exemplary during the year, and we endeavor to keep our facilities open and our employees safe. The Board has engaged strongly with major stakeholders during this crisis to confirm our decision-making and to listen to concerns since they've been raised. I'm pleased to note that the Board strive to be consistent and fair to all stakeholders given the extraordinary events seen in the past year, and especially in discussing items such as dividend distributions and remuneration. It is appropriate for me on behalf of the Board to recognize and thank the employees for their contribution during a very difficult period. With that, change to Slide 5, please. Slide 5 shows our major shareholders. Regular meetings have been held with our shareholders throughout the pandemic. Jim and Bruce met with shareholders after each set of company results were announced. Keith Lough, Annell Bay and myself have met shareholders and proxy groups during Q1 of 2021 as a part of our regular program of engagement. This is a process we undertake annually in which we find both constructive and informative. So let me pass now to Jim for his presentation.

Thank you, Jay, and hello, everyone. Please go to Slide 7. As Jay had said, 2020 was an extraordinary year. But if there is one key point from this past year, it is that Hunting is a critical business trading within a critical sector. Our products and services have supported global economy where other industries were forced to shut down. I am pleased that while we kept our facilities running, our health and safety measures provided -- proved effective in keeping our employees safe. Over $1.3 million was spent on protective equipment and deep cleaning as extra safety measures. So my thanks go to Greg Farmer, our health and safety lead, and his global team. Another issue becoming more important for Hunting and other energy providers is meeting the sustainability, low carbon and ESG goals of our clients. Our strongly quality assured products are required to operate in harsh and challenging environments, but not to impact or pollute the surrounding environment they work in. Whether it is a deepwater hydraulic valve used offshore in West Africa or an H1 perforating gun in Texas, we are driven by safety and performance every day, which is assisting our customers. Slide 8, please. In the year, we have closed or divested 5 operating sites as part of our strategic rebalancing of the group's portfolio. We have also closed 3 distribution centers in the U.S.A. as market conditions deteriorated on where there was an opportunity to consolidate operations. Despite these reductions, we have still maintained our core operating capabilities with over 2.8 million square feet of capacity and over 1,000 high-tech state-of-the-art machine tools and pieces of equipment in our facilities. Slide 9, please. Overview. And now to Slide 10, please. Slide 10 highlights 4 areas where our business strategy has been in action during the year. In February of 2020, we acquired Enpro Subsea. While in December, we divested our drilling tools business. These 2 decisions supported our rebalancing of the group's portfolio towards providing more offshore technology to the market. Our drilling tools divestment will not only allow us to channel our cash toward higher return product line but also gives us an ongoing exposure to the U.S. onshore drilling market. We have continued to introduce new products to our clients in the year, including the commissioning of a new detonation cord manufacturing facility, which is part of the Titan organization, alongside new versions of our H1 perforating system as well as new well intervention products. In February 2021, we also announced an investment in Well Data Labs, a fast-growing data analytics business. Slide 11, please. So looking briefly at Enpro Subsea. This business is based in the U.K. but is being managed alongside our Stafford and RTI business in the U.S. Enpro provides low-cost, flexible field development solutions for operators as well as decommissioning services to end-of-life fields. Enpro's products enable quicker and cheaper field development, which speeds up production and cash flow for our customers. It is a critical aspect of the modern energy industry to shorten the time line from discovery to first oil. Enpro complements our RTI business, which we acquired in 2019, which makes stress joints primarily on titanium for floating production units as well as our Stafford business, which manufactures deepwater hydraulic coupling and injection valves. The enlarged subsea business group recorded excellent year-on-year revenue growth despite the wider negative market conditions seen in 2020, which impacted the other product lines. Slide 12, please. Moving on to Slide 12. Hunting has been in the drilling business for many years and has generated good levels of profit over the last 15 years in this business. However, it is a capital-intensive business, which consumes a high level of cash in order to ensure that our tool fleet remain on the leading edge. In this time, the landscape has become more and more competitive. And so we took the decision in 2020 to align our assets with Rival Downhole, Tools and to make an equity position in the enlarged Rival. The larger scale of the new Rival, coupled with its market share in the U.S. land drilling market gives Hunting ongoing exposure to this subsector while allowing us to better utilize cash elsewhere within the group. Slide 13, please. In February of this year, we made a $2.5 million investment in Well Data Labs. This is an exciting development for Hunting because it increases our knowledge of data processing and the interpretation of onshore fracking operations. The software platform developed by Well Data Labs is used by many blue chip operators and allows real-time decision making to be made as opposed to downloading data and sending it back to the office for sometimes weeks' worth of time for interpretation. This is a big data opportunity for Hunting, and it also allows us to refine our products and technology offering, primarily related to Titan. Slide 14, please. Our next slide highlights the completion of a key investment within our Hunting Titan business. In July of 2020, we commissioned the detonation cord manufacturing line, which will be used not only in our integrated perforating systems, but also will be a stand-alone product line. This $5 million manufacturing investment has the capability of producing 3 million feet of det cord per year and complement our onshore completion products and also open -- will also open up additional opportunities for us in the international market. Slide 15, please. As we have said many times before in this presentation and those in the past, innovation and new product development is key to market leadership, particularly within the global oil and gas business. In the year, we continued to launch new perforating completion, well intervention and premium connection products that are demanded for a fast-moving, ever-changing oilfield service market. We have also introduced our T-Set One setting tool as a rental offering in the year to diversify this product line's revenue stream, which also addresses infill customer preferences. Next slide, please. Slide 16 details the significant restructuring undertaken in the year. We have closed our diversified 5 operating sites and shut 3 distribution centers, as I mentioned earlier. The most significant of these closures was the closure of our Canadian manufacturing facility due to the changes in the marketplace long term. As part of the group's response to the market downturn, we had to release 1/3 of our workforce, an unfortunate but necessary action to align each business unit to the prevailing market environment. But we remain optimistic that we will be in a position to recruit more employees as the market recovers, and we are already starting to do that in areas like Titan. Overall, we realized $86 million of cost savings in the year, which makes us a leaner, more cost-effective business going forward. Next slide, please. I think the oil price chart speaks for itself in that a year ago, we had WTI oil prices going negative for the first time in history as storage capacity tightened in the U.S. This event follows the OPEC+ price war, which started in March. The impact on the U.S. rig count shown in the second chart illustrates how quickly the industry curtailed activity with onshore U.S. rig count halving between Q1 and Q2. This impacted Hunting Titan, especially in our drilling tools business almost overnight with a slowing of our offshore-focused business occurring from Q3 onward. In my career, this was the sharpest downturn I have ever witnessed in this industry. Next slide, please. The market downturn impacted our group results from Q2 onward. In the year, revenue declined 35%, leading to a loss from operations of $16.4 million. However, our business model is resilient. And in Q1 2020, we commenced the cost-cutting drive, which meant that overall, we retained a positive EBITDA of over $26 million for the year as a whole. I credit the experience of the staff and team that I work with for being aggressive in taking these matters head on. Our ability to convert working capital to cash is also clear from our year-end cash and bank position of $102 million or a year-on-year decline of around $25 million, and this is after the purchase of Enpro for $32 million. I believe this to be a fantastic result. Our year-end balance sheet remains strong with net assets of $1 billion, and we have maintained dividend distribution as a result. Our balance sheet and cash position will give Hunting a competitive edge as the market returns to growth and as we look at other expansion or consolidation opportunities. Next slide, please. Slide 19 illustrates the performance of our various product line with the impact of the downturn clearly seen in our Hunting Titan and drilling tools business. A highlight in the year has been the performance of our subsea business group, as we have already mentioned. We have also started to disclose our non-oil and gas revenue, which was fairly resilient in the year as new aviation, space and medical orders were won and completed by our Dearborn and Electronics business. We see significant long-term growth for these non-oil and gas product lines, which utilize our precision machining and electronics core competencies. Next slide. Thank you. This photograph was taken on a Board tour of our RTI business in December of 2019, and it shows the scale of the products manufactured by RTI. In the year, the Stafford and RTI businesses secured great orders in Brazil and the Gulf of Mexico, showing that our astute acquisition strategy, while being careful and considered, also leads to quick results. Next slide, please. We have already mentioned the success of the Electronics and Dearborn business in diversifying their revenue stream. But again, we feel that it also underlines why clients turn to Hunting for strongly assured products in critical operating environment, whether that be in space, on a Falcon 9 rocket or in military applications in jet engines or submarines. Outside of the U.S.A., our U.K. business has also won a supply contract for a geothermal project in the U.K., demonstrating that our traditional pipe business can find new applications and diversify into new markets. All business unit managers have been tasked to look at strong growth opportunities, not only in oil and gas, but utilizing our core competencies in new markets and applications. The Board and Hunting senior leadership team believe that this will be a key feature for the group in the years ahead. Next slide, please. Looking forward to 2021, the group Q1 trading update, which was released to the stock exchange earlier today, tells a story of cautious optimism within the Hunting Group. The lag seen between market indicators and our Q1 results is a quarterly timing issue driven, for the most part, by the slowing of offshore activity in H2 2020, being partially offset by the bottoming out of our U.S. onshore activity. Hunting Titan revenue has improved quarter-on-quarter. And in March, I'm happy to report, it had its best performance since the onset of the pandemic. Our other segments also report stable revenue. All businesses are expected to improve in the second half in the year and onward driven by stronger oil prices and a brighter economic outlook as lockdown measures ease. Next slide. Thanks. This slide presents a strong picture on how sentiment has improved during the quarter. Our annual report highlighted the market view as of December 2020, and the latest report from Spears & Associates published in March showed projections increasing by over 20%. This supports our view of a subdued first half, followed by a strong growth performance throughout the balance of the year and into 2020. Next slide, please. ESG portion. Please go to Slide 25, please. While ESG is a fairly new term in the investment world, the key themes of quality assured products supported by a strong safety record has been a feature within Hunting for many years. In many ways, our position in the industry and reputation with our customers supports our strong position in the oil and gas supply chain. Our safety performance in 2020 is a record for the group, which we are proud of, and it has been achieved even as responsibilities were reassigned as our workforce was reduced as well as each facility operating on a socially dispensed basis. I just can't highlight enough accomplishing this at a time of management under COVID is just an extraordinary feat. And as Jay has said, I would like to thank all of our team at Hunting for delivering this result in the year. Our quality performance also records a good result as we drive for 0 rejects and 0 returns from the field. Next slide, please. Slide 26 shows Hunting as -- at its innovative best. Early in the pandemic, our Asia Pacific operations saw the impact of COVID-19 unfolding and quickly purchased and commissioned a face mask line, utilizing a clean room area in our China facility. These face masks were used locally but also shipped to every Hunting facility for use by employees and their families. We were also able to donate to local charities and higher risk organizations who needed PPE. So my thanks go to Daniel Tan, our Regional Managing Director in Singapore, for this amazing effort. Next slide, please. We have made steady progress in the area of diversity following the appointment in 2018 of a new global HR officer. We will continue to enhance our procedures and diversity hiring across our global footprint over the coming years. Next slide, please. On Slide 28, we detail our carbon data. In 2020, we started the process of aligning our monitoring and reporting against the TCFD framework, and we will be looking to reach stronger reduction targets after this program has been rolled out across Hunting's group later this year. Just to highlight, Hunting's facilities are state of the art, and our carbon footprint is extremely low as a high-tech manufacturer. Slide 29, please. So in conclusion, I believe that Hunting has weathered the worst industry storm in nearly 35 years. We have executed our strategic plan. We have realigned our cost base to prepare for the market's return to growth, and we have closely engaged with our many stakeholders on our plans. Thank you. With that, back to Jay.

Thanks, Jim. And again, on behalf of the Board, I want to thank Jim and Bruce and the entire Hunting leadership team for their efforts during this past year has really been remarkable.

We will now share with you the questions received from shareholders ahead of the meeting. And unless the question has been specifically addressed to another member of the Board, I will provide the answers to the submitted questions. After the slides have been addressed, we will answer the questions which have been received during the course of the meeting. First question has the tax vouchers. Please change to Slide 31. The question is, why has the company stopped providing tax vouchers with dividend information? Our answer to this is that the tax rules on dividend distributions changed in the U.K. a number of years ago with the level of tax on all dividends now driven by certain thresholds and the personal tax rates of shareholders. We would recommend speaking to Equiniti, our registrar, if your shares are held in the nominee account or to your local tax adviser if you are an overseas shareholder, as the company is not in a position to give specific tax advice. Please turn to the next slide. This question deals with share buyback. And the question is, given the fall on the company's market cap over the past year and the wide discount to tangible net asset value and available free cash flow, what is management's perspective on initiating a share buyback program as the best way to deploy available capital to the benefit of shareholders currently? Our response is, is that the Board is aware of the disconnect between the company's market capitalization and its net asset value and believe that investors are waiting to see evidence of a return to positive earnings before a re-rating of the share price will occur. As we've highlighted in the presentations, we believe that the market sentiment has improved during Q1 2021, which should lead to a quicker return to profitability. The Board is also reviewing its options in respect to a buyback, but at this point, believe that the better use of the group's cash can be made through strategic acquisitions and consistent dividend distributions. And I believe those are the only questions that arrived prior to the meeting. So please move to the following slide, Slide 33.

At this point, we'll discuss the proxy and the resolutions involved. So please move to Slide 34. We would like to thank all shareholders for taking the time to submit questions and hope that these responses have been thorough. We will now turn the proxies received as of Monday, 19th of April 2021. We will note that all resolutions have received the required level of support. So turning to the business of the AGM and the poll. Number one, I can confirm that a quorum is present and that the notice of AGM has been made available to our members. Secondly, voting on all resolutions will be on a poll. Therefore, each shareholder has 1 vote for every share held. Thirdly, I would like to appoint Equiniti, our registrar, as a poll scrutineer. The poll will close 10 minutes after the end of the meeting. The registrar will calculate the results at the close of the poll. These will be announced in the stock exchange later today and will also be published in the company's website. I now propose, formally, that each of the resolutions set out in the notice of meeting and also numbered on the poll card are put to the meeting with the exception of Resolution 3. Resolution 1 to 13 are ordinary resolutions and require a simple majority of the votes cast to be in favor to be passed. Resolutions 14 to 17 requires 75% of the votes cast to be in favor to be passed. I now declare the poll formally open. Finally, I would like to thank you, once again, for listening to our AGM, and I now declare the meeting closed. Thank you.