Pason Systems Inc

TSX:PSI

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. My name is Ina and I will be your conference operator today. At this time, I would like to welcome everyone to the Pason Systems Inc. Second Quarter 2023 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 written consent of Pason Systems Inc. Please note that 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 now begin your conference.

[Celine Boston, CFO]

Thank you, operator. Good morning everyone and thank you for attending Pason's 2023 second 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 second 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 pleased to report on Pason's second quarter 2023 results, which highlights the company's ability to deliver on strong financial performance despite a modest decline in activity levels.

Pason generated consolidated revenue of $84.7 million in the second quarter of 2023, a 15% improvement over the second quarter of 2022. With this revenue, Pason generated $37.9 million in adjusted EBITDA, which represented 44.7% of revenue and an increase of 22% from the $31 million generated in the second quarter of 2022, which represented 42.1% of revenue in that period.

All of the company's business segments contributed to this quarterly results. Compared to the second quarter of 2022, our North American segment grew both revenue and gross profit despite industry activity declining by 1% year-over-year.

The business unit generated revenue per industry day of $910 in the second quarter of this year, representing the second time in Pason's history that this metric surpassed $900 and a 14% increase from the same quarter of 2022.

This result continues to highlight the company's strong competitive position, the growing demand for our products and technologies, and a more favorable pricing environment.

Resulting North American revenue was $67.3 million in the second quarter, a 13% increase from the second quarter of 2022, while segment gross profit increased by 11%.

Similarly, revenue generated per day in our international end markets also improved year-over-year. The business unit also benefited from stronger industry activity in its key end markets and favorable foreign exchange rates for US dollar-linked contracts.

Revenue generated by the International business unit was $15 million in the second quarter, a 22% improvement from the second quarter of 2022. Segment gross profit was $7.2 million in the second quarter of 2023, a 34% increase from the $5.4 million generated in the second quarter of 2022.

Energy Toolbase continues to grow its presence in the solar and energy storage industry and generated $2.4 million quarterly revenue, a 44% improvement from the same quarter in 2022.

Sequentially, Canadian rig count fell through spring breakup before beginning to recover at the end of the second quarter and US rig counts trended down approximately 100 land rigs or roughly 12% in the second quarter. Given our leading competitive position in the North American end market, consolidated revenues largely followed suit and decreased sequentially from $98 million in the first quarter to $84.7 million in the second quarter.

Following the reduction in revenue with the company's mostly fixed cost structure, adjusted EBITDA of $37.9 million in the second quarter decreased from the $52.4 million seen in the first quarter of 2023.

Our second quarter results continue to highlight our mostly fixed cost base. Of note, our rental services costs, which represent the largest operating cost category within the business and represented in excess of 60% in the second quarter of 2022, have increased by less than 1% since the third quarter of 2022 despite inflationary impacts and a stronger US dollar. In that same time period, revenue per industry day has grown by 4.5%.

We will continue to manage our fixed cost structure towards our expectation of upcoming activity levels, and we'll 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.

Net income attributable to Pason for the three months ended June 30th, 2023, was $25.5 million or $0.32 per share, a 37% increase from the $18.5 million or $0.23 per share generated in the second quarter of 2022.

Net income in the first quarter of 2023 benefited from higher levels of interest income earned on the company's invested cash and cash equivalents, along with slightly lower stock-based compensation expense, which reflects the mark-to-market on the company's cash settled stock-based compensation plans.

Year-to-date, Pason generated $182.9 million in revenue, a 24% increase from $148 million in the corresponding 2022 period. This compares to an 8% increase in underlying North American land drilling activity year-over-year.

Adjusted EBITDA for the six months ended June 30, 2023 was $90.3 million or 49% of revenue compared to $64.3 million or 43% of revenue for the first six months of 2022. Accordingly, net income attributable to Pason in the first six months of 2023 was $61.3 million or $0.76 per share, up from $37.1 million or $0.45 per share.

A comparison of year-to-date results highlights the improved industry conditions in the first quarter, higher levels of revenue generated per operating day in 2023, and strong operating leverage.

Our balance sheet remains strong and incredibly well-positioned to make strategic investments, while returning meaningful cash flow to shareholders. Pason generated $29.7 million in cash flow from operations in the second quarter, a 15% increase from the second quarter of 2022.

In the second quarter, Pason spent $11.7 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 and also representing an element of catch-up from lower levels of capital expenditures in 2020 and 2021.

Also in the second quarter, we approved and funded $5 million of the $15 million that was remaining under the company's preferred share financing agreement with Intelligent Wellhead Systems and further funded another $5 million subsequent to quarter end.

We remain committed to shareholder returns and in the second quarter, returned $16.6 million to shareholders through dividends and share repurchases. We ended the quarter with no interest-bearing debt and $175 million in total cash.

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

[Jon Faber, President and CEO]

Thank you, Celine. Our second quarter financial results again demonstrated our ability to generate results that outpace underlying drilling industry activity. The year-over-year increases in consolidated revenue and adjusted EBITDA of 15% and 22%, respectively were significantly ahead of the 1% decrease in industry activity.

Our North American revenue per industry day came in at $910 during the quarter, a 14% increase during the same period of 2022. 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 posted a 22% increase from the prior year period, benefiting from increased industry activity and strong increases in revenue per EDR day.

Energy Toolbase revenue increased by 44% year-over-year due to the installation of additional energy storage control systems and growth in revenue from our economic modeling software tool.

We remain focused on maintaining appropriate control over our operating and capital costs, while ensuring that we strengthen our capabilities in areas that directly impact our service and technology advantages and provide capacity for additional revenue growth.

Our outlook for a return of steady growth in North American industry activity in the second half of 2023 is unchanged. After declining steadily through the first half of the year, we expect North American land rig counts to plateau near current levels before beginning to steadily increase through the end of 2023 and into 2024.

Ultimately, the economic forces of supply and demand established the prevailing direction of industry activity. Global oil demand continues to exceed pre-pandemic levels, while all sources of supply, including storage, production, the inventory of drilled but uncompleted wells, and drilling activity, remain below pre-pandemic levels. Any efforts to increase supply will require additional drilling activity and as such, 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 the digital data transmission and storage protocols.

We continue to 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 continue 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 value for shareholders 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.

During the second quarter, we funded $5 million as part of our previously announced preferred share financing arrangement with IWS with a further $5 million deployed early in the third quarter.

Energy Toolbase is also showing positive momentum. Demand for energy storage is growing as government policies incentivize 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 systems 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 $36.4 million to shareholders first half of 2023 compared to $52.7 million in free cash flow generated over the period and we are maintaining our quarterly dividend of $0.12 per share.

Our balance sheet remains strong with cash and short-term investments of $175 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 of the oil and gas drilling market and to return meaningful capital to shareholders.

Our demonstrated ability to generate revenue growth that outpaces the growth in underlying drilling industry activity and our high operating leverage will allow us to deliver strong financial results as rig counts begin to increase. And the momentum within both Energy Toolbase and Intelligent Wellhead Systems gives us confidence in even greater growth in the future. 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]

Mr. Faber, there are no questions at this time. Please proceed.

[Jon Faber, President and CEO]

Terrific. Thank you, operator and thanks for taking the time to join us this morning. If you do have questions following the call, you can certainly reach out to Celine or myself at any point, we would be happy to answer questions that you might have. We appreciate your continued support and interest and we look forward to speaking to you with the release of our third quarter results. Have a great day.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.