Pason Systems Inc

TSX:PSI

Earnings Call Transcript 2023-Q1

[Operator]

Good morning. My name is Joelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Pason Systems Inc.'s [First] (ph) Quarter [2023] (ph) Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

The contents of today's call are protected by copyright and may not be reproduced without the prior consent of Pason Systems, Inc. Please note the advisory is located at the end of the press release issued by Pason Systems yesterday, which describe forward-looking information. Certain information about the company that is discussed on today's call may constitute forward-looking information. Additional information about Pason Systems, including the risk factors relevant to the company, can be found in its annual information form. Thank you.

Celine Boston, CFO, you may begin your conference.

[Celine Boston, Chief Financial Officer]

Thank you, operator. Good morning, and thank you for attending Pason's 2023 first quarter conference call. I'm joined on today's call by Jon Faber, our President and CEO.

I'll start today's call with an overview of our financial performance in the first quarter. Jon will then provide a brief perspective on the outlook for the industry and for Pason and we'll then take questions.

I'm very pleased to report on Pason's first quarter 2023 results, which continue to demonstrate our strong competitive positioning, the increasing demand for our products and technologies and significant operating leverage. Pason generated consolidated revenue of $98.2 million in the first quarter of 2023, a 32% improvement over the first quarter of 2022.

With this revenue Pason posted $52.4 million in adjusted EBITDA, which represents 53.4% of revenue, a significant increase from the $33.4 million or 45% of revenue generated in the first quarter of 2022 and a continued demonstration of our mostly fixed cost base. All of the company's business segments contributed to the strong quarterly results.

Our North American segment set a new quarterly record level for revenue per industry day at $922, beating the previous record of $890 in the fourth quarter of last year. This result benefited from a strong Canadian winter drilling season, which is a region that has historically generated higher levels of revenue per day, but also represents maintained leading market share and an improved pricing environment.

Resulting North American revenue was $80 million in the first quarter, a 29% increase from the first quarter of 2022, while segment gross profit increased by 43%. Both of these results, once again, outpaced the improvement in underlying industry conditions.

Similarly, activity levels and revenue generated per day in our international end markets also improved year-over-year. And revenue generated by the International business unit was $15.6 million in the first quarter, a 46% improvement from the first quarter of 2022. Segment gross profit was $7.8 million in the first quarter of 2023, a 70% increase from the $4.6 million generated in the first quarter of 2022.

Energy Toolbase, our emerging business in the solar and energy storage market, posted its highest quarterly revenue level yet, with $2.9 million generated in the first quarter of 2023, a 61% increase from the first quarter of 2022. First quarter revenue for this segment benefited from commissioning of control systems projects and improved pricing on its economic modeling software tool. As we've previously noted, reported quarterly revenue for this segment will fluctuate with the timing of control systems installations.

Sequentially, while we benefited from strong industry activity in Canada through its winter drilling season, U.S. rig counts fell slightly quarter-over-quarter. Despite North American activity levels remaining relatively flat sequentially, both revenue and adjusted EBITDA results improved from the fourth quarter of 2022 to the first quarter of 2023.

With respect to our cost structure, our first quarter results continue to highlight our mostly fixed cost base and our ability to benefit from higher levels of revenue within this context. We will continue to see variable elements of our cost structure fluctuate with revenue, and we'll continue to work to manage inflationary effects on our business. These effects, along with changes in foreign exchange and the relative mix of rigs within our end markets, could have an impact on quarterly margins in the coming quarters.

That said, our fourth quarter adjusted -- our first quarter adjusted EBITDA results of $52.4 million represents 53.4% of revenue and 80% incremental adjusted EBITDA when compared to the prior year comparative period, demonstrating significant operating leverage.

Net income attributable to Pason for the three months ended March 31, 2023, was $35.8 million or $0.44 per share, a significant increase from the $18.6 million or $0.23 per share generated in the first quarter of 2022. Net income in the first quarter of 2023 benefited from much lower stock-based compensation expense, which reflects the mark-to-market on the company's cash settled stock-based compensation plan.

Our balance sheet remains strong and incredibly well positioned to make strategic investments, while returning meaningful cash flow to shareholders. Pason generated $46.3 million in cash flow from operations in the first quarter, a 65% increase from the first quarter of 2022. The company's proactive efforts on building inventory levels to mitigate supply chain challenges are now mostly complete.

In the first quarter, Pason spent $11.6 million in net capital expenditures in support of our core business, representing the ongoing refresh of our technology platform and the maintenance of our fleet. Also in the first quarter, we slightly increased our investment in Intelligent Wellhead Systems and emerging completions technology business through a $400,000 increase in our minority ownership position.

Subsequent to quarter end, Pason approved and funded $5 million of the $15 million that was remaining under the company's preferred share financing agreement with Intelligent Wellhead Systems.

We remain committed to shareholder returns, and in the first quarter, returned $20 million to shareholders through dividends and share repurchases. We ended the quarter with no interest-bearing debt and $185 million in total cash.

In summary, we are very proud of our first quarter results and feel incredibly well positioned entering the 2023 year.

I will now turn the call over to Jon for his comments on our outlook.

[Jon Faber, President and Chief Executive Officer]

Thank you, Celine. Our first quarter financial results represented the continuation of strong performance by Pason. Pason, again, outpaced the growth in underlying drilling activity, with a 32% increase in consolidated revenue, exceeding the 18% year-over-year change in North American land drilling activity.

We posted another quarterly record for North American Revenue per Industry Day in the quarter at $922, exceeding the $900 level for the first time. We maintained our leading market share position, while seeing increases in product adoption and improved price realization, both of which we expect to see continue going forward.

Our International business unit generated revenue of $15.6 million, up 46% from the prior year. Our International business benefited from increased industry activity and strong increases in revenue per EDR day from higher product adoption and pricing.

Energy Toolbase revenue increased by 61% year-over-year, due to the installation of additional energy storage systems and stronger price realization for our economic modeling software tool. We remain focused on maintaining appropriate control over our operating and capital costs, with our most significant cost increases coming in areas that directly impact our service and technology advantages and providing capacity for additional revenue growth.

While U.S. land activity softened in the first quarter, and Canada began to experience its seasonal declines due to winter breakup, our outlook for a return of steady growth in North American industry activity in the second-half of 2023 is unchanged. Ultimately, the economic forces of supply and demand established the prevailing direction of industry activity.

Significant draws from oil storage and inventories, and an inventory of drilled, but uncompleted wells below what industry analysts consider to be sustainable levels, cannot persist in perpetuity, while global oil demand continues to exceed pre-pandemic levels. Our outlook for continued growth in land drilling remains positive.

Pason sits at the center of the drilling data ecosystem on the majority of rigs in the Western Hemisphere. As customers use more automation and analytics technologies, data requirements are increasing. We are ensuring that we have the capabilities to manage additional sources of data, higher volumes, throughputs and speeds of data and additional transmission and storage protocols.

We expect capital spending of approximately $45 million in 2023 as we renew and extend the capabilities of important parts of our hosting platform. We also continued to make investments in our operational assets, which were curtailed in recent years by challenging supply chain conditions.

We continue to evaluate our capital program with a focus on supporting increasing revenue, generating free cash flow and creating shareholder value over time, rather than simply in response to prevailing near-term industry conditions. We continue to make investments in growth-related opportunities outside of our core drilling-related business.

The growth trajectory of Intelligent Wellhead Systems is encouraging. We will support the required investments in working capital and capital expenditures to ensure that IWS is positioned to fully capitalize on these opportunities. Demand for energy storage is growing as government policies, such as the Inflation Reduction Act in the United States, and net energy -- or Net Metering 3.0 in California incentivized the deployment of additional energy storage assets.

We are adapting our approach to the sales of our intelligent energy management control systems to leverage Energy Toolbase's strong brand position to further build our pipeline of control system opportunities. We are also expanding the functionality of our economic modeling software tool to support higher price realization and to handle the unique requirements of additional markets.

We remain committed to returning capital to shareholders through our regular quarterly dividend and through share repurchases. We returned $20 million to shareholders in the first quarter, and we are maintaining our quarterly dividend to $0.12 per share. Our balance sheet remains strong, with cash and short-term investments of $185 million and no debt.

The strength of our business allows us to make the required investments to secure our position as the leading provider of drilling data and technologies, to pursue additional sources of revenue outside the oil and gas drilling market, and to return meaningful capital to shareholders.

We remain focused on ensuring that Pason is an innovative, profitable and responsible company. And we would now be happy to take any questions.

[Operator]

Thank you, ladies and gentlemen. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Keith MacKey with RBC Capital Markets. Please go ahead

[Keith MacKey, RBC Capital Markets]

Hi, Jon, Celine. Good morning. Thanks for taking my questions. Hey just maybe to start out with the International. Certainly, a good quarter there. Can you just maybe compare and contrast the relative profitability between North American international markets? I know the International has generally been lower margin. But where is that segment in terms of adoption and market share relative to North America? And how close do you think it could ultimately get, if not higher?

[Jon Faber, President and Chief Executive Officer]

Good question, Keith. I think you asked a few questions there actually. I think when we think about market share and certainly in markets like in South America and Australia, we would have very high market share as you would know. And so I don't think that's quite so dissimilar.

On the product adoption side, some of the newer, more advanced technologies are starting to get adopted into the international markets, probably faster than they used to. In the history of Pason, I think it took longer for some of the new technologies to find their way to the international markets. They're getting adopted a little sooner in some of the international markets. That obviously helps us.

There's been a move in the types of rigs and the complexity of what they're doing in some of the international markets, which helps drive product adoption of existing products beyond just the new products, which helps us. But I think when you talk about ultimately where could the margins get to, one of the things in certain international markets is that you just don't have the density of rigs in a specific geographic location like you do in the North American markets. And so that just, ultimately, means you have a little bit higher operating costs in support of that revenue at times because of the rig density and the ability to have a certain number of field folks looking after the rigs that are there.

[Keith MacKey, RBC Capital Markets]

Got it. That's helpful. Thanks, Jon. And just secondly, in North America -- so certainly, the operating leverage in the business has been very good as things have come up. Now as the U.S. rig count takes a bit of a breather here and has retraced, like should we be thinking about a similar decremental margin on the way down? Or do you think that you can kind of hold this revenue and margin levels more flat, assuming the rig count kind of drops in the 30% to 40% range and then recovers in the second-half of the year?

[Celine Boston, Chief Financial Officer]

Sure. So you're certainly going to see some seasonality effects on the Canadian side. That will put some downward pressure, I would say, in the second quarter, and that's expected. And you would -- I mean you see that every year for Pason.

On the U.S. side, you know this well, Keith. A large majority of those costs on the rental services side for the North American business are fixed in nature. We've kind of scaled up the organization for these levels of activity, and that's where -- we kind of shipped away at that over the last couple of years. And so you've seen those levels remain much more stable in the last couple of quarters. We view that softness that you mentioned on the U.S. rig count side of things really being more short-term in nature. And so we really probably don't see any significant cuts on the cost side of things. But that's that. I mean you're talking 30 to 40 rigs on a U.S. land rig count of 730, I think we're at close to today. That's -- we still generate very attractive margins in that business unit at those levels.

[Keith MacKey, RBC Capital Markets]

Okay, I’ll leave it there. Thanks very much.

[Jon Faber, President and Chief Executive Officer]

Thanks, Keith.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Jon Faber, President and Chief Executive Officer]

Thank you, Joelle.

[Operator]

Just another question...

[Jon Faber, President and Chief Executive Officer]

Thank you for those -- sorry, we do have a question. I apologize.

[Operator]

Your next question comes from Eddie Kim from Barclays. Please go ahead.

[Eddie Kim, Barclays]

Hi, good morning. I just wanted to dig in a little deeper on the softening rig count that you saw in the first quarter and your expectations for a rebound in the second-half? I imagine the softness is coming out of the gas basins. And I have to imagine the rebound that you expect in the second half is on the oilier basins. Did I get that right? If you could just provide a little bit more color by basin and what you're seeing currently, that would be great.

[Jon Faber, President and Chief Executive Officer]

Eddie, on a high level, I would say that's consistent with what we would see and what we would hear in conversations with customers. Now obviously, the oil price itself has become quite volatile in the last week or so. So what that will ultimately mean I think, will be a question.

But yes, the conversations we would have, we do see a difference between some of the gassier areas and the oilier areas. And I think when we talk about the second-half kind of increasing, we think that's slow and steady. We don't think we necessarily sort of make up for what we maybe would have initially anticipated as growth in the first half. But we think that once we sort of stabilize and start to move up, it will be slow and steady from there.

[Eddie Kim, Barclays]

Okay, okay. Understood that’s very helpful. Thank you, those are all on my end. I’ll turn it back.

[Jon Faber, President and Chief Executive Officer]

Okay. Thanks, Eddie.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Jon Faber, President and Chief Executive Officer]

Thank you, Joelle. Thanks for those who have joined us for the call this morning. We appreciate your continued interest and your support. If you do have further questions, you can certainly reach out to Celine or myself, and we would welcome your calls. We look forward to speaking to you again after the second quarter. Have a great day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.