Q3 2019 Earnings Call

The contents of today's call are protected by copyright and may not be reproduce without the prior written consent of peace on systems, Inc. Please note. The advisories located at the end of the press release issued by piece on systems yesterday, which described forward looking information certain information about the company that is discussed on today's call. It may constitute for it.

Looking information additional information about peace on systems, including the risk factors relevant to the company can be found in its annual information form ladies and gentlemen, and thank you for standing by and welcome to the Peace on Systems, Inc. Third quarter results Conference call. At this time, all participants are gonna listen only mode. After the speakers presentations there'll be a question and answer session.

To ask a question during the session you'll need to press star one on your telephone please be advised that today's conference as being recorded if you require any further assistance. Please press start zero Oh now like to hand, the conference over to your speakers today, Marcel Kessler President and C.E.O. Please go ahead.

Thank you.

<unk>.

Yeah in Calgary, today's Jong favor, our chief financial Officer.

I will start with the highlights of the quarter, Sean go diving into the details of our financial performance.

Close with a brief perspective on the outlook for the industry and for peace on and it'll go and take any question.

Payphones operating environment across North America has deteriorated into the recorder.

Industry activity and cannot there remains at low levels and decrease safer, 37% compared to the previous year.

The situation in the United States is also challenging with drilling activity dialing 14% driven by the industry facing pressures from equity and that investors to constrain spending within cash flows.

D headings were partially offset by higher activity and paste on international market.

Market share increases in the United States and continued growth in for like penetration you know all geography, leading to higher revenue per E.D.R. day.

Driving to increase the revenue per E.D.R. gave her to hire adoption of state that delivery and certain other peripheral products.

The company generated revenue off $72.2 million into period, a decrease of 12% compared to the same color last year and essentially unchanged from the second quarter.

Adjusted EBITDA lost $31.6 million for the quarter.

26% and up slightly from the second quarter.

Hey, sound recording that didn't come a $15.4 million compared to 24.4 million into prior year end up from $9.2 million into second quarter.

At September 30th are working capital positions that $230 million, including cash and short term investments of $181 million.

Maintaining our quarterly dividend 19 cents per share.

Before turning to call over to John for a more detailed look at the financial I'll make a few comments about the two reasons investments space on age.

These two investments provide avenue avenues for us to deploy hour distinctive capabilities in two additional and markets.

In September the announced the acquisition of a majority interesting of energy to base L.L.C. or E.T.B., a private U.S. based software as a service company for 20 million U.S. dollars.

E.T.V. provides an industry leading software package to model, the economics and build proposals for solar energy storage projects.

E.T.B. product is utilized by a significant number of distributed energy project developers across the United States.

Building on paste on deep data management expertise, we are combining the capabilities of E.T.V. and pace on power.

Over the last two years space on power has been building a foundation and just older in energy storage markets through its I.B.M.S. control system and energy day Dot products.

With this investment Viet positioning ourselves for meaningful long term gross into solar energy storage market.

[noise] in October the announced 825 million dollar investment to acquire a minority interest in intelligent well have solution or I got the U.S.

I W.S. is a privately owned oilfield technology and service company that provides unique surface control system for well completions and work overall operations.

Pay someone has been looking to enter the completion space for several years and I've only U.S. represents the first truly compelling opportunity be have seen very belief that each and built on our expertise in end to end data management and rocket eyes to feel technologies.

We are excited to play a role in I.W.S. continued growth.

And that will now turn to call over to John .

Thank you Marcel.

I was Marcel noted industry conditions remained challenging in the third quarter of 2019 with activity levels down in both Canada and the United States.

Industry activity was down 14 per cent in the U.S. compared to the third quarter of 2018 and down 37% year over year in Canada.

<unk> just backdrop consolidated revenue decreased by 12% and the third quarter.

In the United States market share increased to 63% and revenue for E.D.R. day increased by 3% to $736 per day.

In Canada, we saw revenue for E.D.R. day increase 11% year over year to $1325, while reported market share decrease 281% in the corridor.

Our international business unit reported at 5% increase in revenue for the quarter. After accounting for a 1.7 million dollar reduction to revenue as a result of applying hyperinflationary accounting to our results in Argentina.

Consolidated revenue in the third quarter totaled $72.2 million and was essentially unchanged from the second quarter.

Drilling data remains our largest revenue category accounting for 52% of revenue.

Growing demand for our data delivery products helps mitigate revenue declines from decreased industry activity in this category.

Mud management and safety revenue represented 29% of revenue in the corridor.

The revenue decrease in the category was less than the overall revenue decreased due to increased adoption of certain peripheral products during the quarter.

Communications revenue contributed seven per cent of revenue in the corridor.

Decreases in this category remain the largest among the revenue categories due to changes made to our pricing arrangements in 2019 as a result of adopting new lower cost technologies to provide service in the space.

Drilling intelligence revenue accounted for 7% of third quarter revenue.

Revenue in this category decreased as a result of the overall decrease in North American land drilling activity with additional headwinds in the United States from rig type and customer mix changes in the quarter.

Revenue in our analytics another category contains product and service offerings, which are less closely correlated to drilling activity.

As a result revenue in this category decrease play only 2% year over year unrepresented, 5% of total revenue.

Adjusted even to offer the third quarter of $31.6 million was down 26% from the third quarter of 2018 and up 3% sequentially from the second quarter.

On a year to date basis, adjusted even to have $102.9 million down 4% from the first nine months of 2018, well revenue is up 1% to $227.2 million.

Net income or $15.4 million for the third quarter or 18 cents per share was down 37% from the third quarter of 2018 and up 67% sequentially.

No I didn't come a $43.7 million or 51 cents per share for the first nine months of the year was a 4% improvement from 2018 levels.

Research and development and corporate services expenses were relatively unchanged on a sequential basis, well r. and D. expenses are up 13% year over year for the corridor largely as a result of a shift towards more cloud based I.D. infrastructure as we entered the fourth quarter of 2018.

Capital expenditures for the first nine months of 2019 totaled $18.6 million up 21% from the same period of 2018.

Quarter cap exit $4.1 million was 16% lower than 2018 levels.

We continued to expect to spend up to $30 million of on capital expenditures in 2019.

Pace on generated free cash flow of $33.1 million and the third quarter up 23% from the third quarter of 2018 and up to present sequentially driven by a reduction in accounts receivables and lower capital spending.

For the first nine months of the year free cash flow is $66 million was down $2.9 million from 2018.

As a reminder year to date free cash flow includes the negative impact of a 15.3 million dollar payment related to our bilateral advanced pricing arrangement with the C.R.A.N.D.I.R.S.

We continue to carry an income tax recoverable at $15.3 million related to the offsetting refund do from the I.R.S. once they have completed their reassessment prior your tax returns.

It was Marcel noted during the core we deployed U.S. $20 million to acquire a majority interest in energy to a base L.L.C.

Oh now turned to a brief overview of the results for each of our business units.

Or U.S. business unit revenue decreased 8% or 9% measured in U.S. dollars in the third quarter in the face of a 14% decrease industry activity.

Market share for the quarter of 63% was up both on a year over year basis and sequentially from the second quarter.

Revenue for E.D.R. day increased 3% year over year and the third quarter in large part from increased adoption of data delivery products in our day drilling data category.

And certain peripheral products in our mud management and safety category.

For the first nine months U.S. revenue of $157.9 million is up 6% from 2018 levels.

Operating costs increased 6% year over year in the U.S. and 12% under your your date basis, reflecting are increased operational capacity and select operating regions.

As a result segment girls profit for the U.S. business unit decreased by 18% to $25.9 million and the third quarter.

Gross profit for the nine months ended September 30th of $84.8 million was up 1% over prior year results.

The Canadian business unit managed to again out perform very challenging industry conditions and the third quarter.

Hey sounds revenue for the quarter was 31% lower than 2018, well industry activity was down 37% for the same period.

On a year to date basis patients, 23% revenue decrease compares to a 32% decrease in industry activity.

In our second quarter conference call, we indicated that we expected the combination of low drilling activity levels and a greater proportion of cost focused operators in the active customer mix.

Result in downward pressure on market share well, new product and service offerings would provide support so revenue breed yard day.

Reported market share of 81% was down from 85% and the third quarter of 2018, while revenue for E.D.R. day increased 11% in the third quarter and 8% on a year to date basis.

With drilling activity expected to remain near historically low levels in the upcoming quarters. We expect market share will continue to be more volatile than in years past owing to the proportionate impact of the gain or loss of anyone rig.

Sequentially revenue increase 50 per cent, reflecting the seasonality of Canadian drilling activity.

Operating costs were down 12% in Canada in the third quarter and 19% on a year to date basis, largely as a result of reduce purchasing cost in our communications category.

Segment gross profit for the Canadian business unit, a $4.3 million was down 58% from the third quarter of 2018.

For the first nine months of the year segment gross profit came in at $13 million.

Our international business units are continued strong performance in the third quarter.

Despite a 1.7 million dollar negative impact revenue as a result of applying hyperinflationary accounting to Argentina operations reported third quarter revenue $8.5 million was up 5% from the third quarter of 2018.

Sequentially International business unit revenue was down $1.5 million as a result of the previously mentioned impact of Hyperinflationary accounting.

Segment gross profit in the international business unit of $2.9 million was largely unchanged from a year ago.

Year to date girls profit from the international business unit stood at $9.3 million up 78% from 2018 levels.

In summary.

Hey sons third quarter results represent continued out performance in the context of challenging industry conditions.

Here defending our competitive physician, while seeking opportunities to grow revenue pre D.R. day through delivering enhanced functionality to our customers.

We continue to prudently manage our costs with a view to sustaining or profitability without impairing our ability to fully participate went industry conditions improve.

Or balance sheet remain strong.

September 30th prior to the investment in intelligent well had systems, we had 203 <unk> $30 million of working capital, including $181 million of cash and no interest bearing debt.

We are returning cash to shareholders through a regular dividend and our normal course issue or been program.

So the first nine months of the year, we paid in aggregate $47 million and dividends and we're maintaining our quarterly dividend at 19 cents per share.

We deployed a further $13 million in the first nine months toward our normal course fish were bid.

More than off setting the effects of delusion from stock option exercises in the trailing 12 month period.

Now now during the call back to Marcel for his comments on our outlook.

Thank you John .

Withdrawing activity levels declining and operators maintaining discipline about spending levels visibility remains quite poor with respect to operator boxes as he moved into 2020.

There is a chance that recounts seville bought them into fourth quarter, but they may stay low for some time.

However.

Leaf that there are good reasons for optimism regarding growing activities the medium term.

Demand for oil it continues to increase each year.

Assumption of oil based product has gone from 75 million barrels per day in 1999 to over 100 million barrels per day this year.

The industry needs to add more than 1 million barrels per day off it was supply each year.

<unk> relies on hydrocarbons and there's nothing on the horizon that can replace it.

Fears that the trade war between the U.S. Sunshine I will significantly reduce oil demand seem overblown anti international Energy agency has <unk> use their oil demand forecast by only 100000 barrels per day.

It is not possible for us all production to keep increasing or even stay flat if drilling activity is low and dropping.

Oil prices need to go higher at some point to avoid to avoid to supply shortage and drilling activity will follow.

And this environment, we are keeping are fixed costs low and maintaining flexibility for our go forward plans, which gives us the means and confidence to address any activity scenario.

We're not playing to reduce our r. and D. efforts.

Capital expenditures will be relatively modest going forward with a large portion of development efforts focus on software the expect to be expect capital spending levels to be up to $25 million in 2020.

Our highly capable and flexible idea and communications platform can host additional new pace on and third party software at the Rexite and in the clouds.

Our market positions remain strong and he expects to be able to the liberal growth in our international markets and through higher product at auction going forward.

Finally.

It to highlight that the timing of the two reasons investments close to each other bus coincidental.

<unk> being investigating opportunities to make an investment in the completion space as the basis to accelerate our efforts into solar and energy storage market for some time there are no additional investments plants in the short planned in the short term in either area. However, Beagle continued to scan the drilling complete.

<unk> and power markets were attractive long term growth opportunities.

Not be happy to take any questions.

I feel like ask a question at this time. Please press star one on your telephone keypad, if they're like to retire question press the pound key well costs for just a moment tick of highly curable roster.

First question comes from Gray Coleman with National Bank financial.

Hey, Thanks for taking my questions.

I'm already Greg Good morning Group I, just wanted to start by talking a little bit about the outlook Marcel I would agree entirely than in the medium term the recount trajectory and oil project production trajectory are mutually up sustainable.

Medium term, but in the short term you know our view is that the role of the U.S. recount as like to continue and your guidance looking into at least early 2020 would be cautious as well.

I I'd like to talk about your cost structure in the current environment versus previous environments. When we've seen your revenue role is is there any reason that if 2020 should be a down year from a revenue perspective that there's overall changing the way he margins react.

In this cycle versus previous given the changes in your cost structure operational efficiencies and adoption of some complimentary products.

[noise], Greg intellectually, let John take that question.

Hi, Greg.

If you look back a few years when we came into the downturn lay 2014 into 2015.

No. We we made a number of changes to the cost structure reduced a number of fixed costs made some other costs more variable.

We've done a very good job I think since then not bringing a lot of those costs back. So I think our costs structure, we feel quite comfortable with today and Marcel indicated we we certainly wouldn't to anticipate making any reductions on the r. and d. side on the operational side I think it's very important for us to maintain our capacity to respond as things get better.

<unk> into the medium term. So we tend to look at this with more of a a two year to three year outlook on where we think activity may go rather than a response to the one year expectations and and I think our costs structure is is quite appropriate today. So if revenue were to to go down into 2020 as a result of activity slowing I think you would.

See some more compression on the but <unk> inside a as a result of that I, just don't think will be as responsive on the costs side.

Got it so <unk> margin compression we've seen in the past would be indicative of what we would see if we if if revenue as to roll. There's no reason for it to be materially different than in in sort of this cycle than what we've seen a previous downturns.

That would be correct.

Just keeping on unfortunately, certain negative view topic here if industry activities do deteriorate say more significantly then and then he was looking at 2020.

Would you be comfortable using your cash balance to temporarily support the dividend throughout periods of negative free cash flow say 123 quarters or would you look to defend the balance sheet and periods of negative free cash flow look to change the dividend policy.

No I think the short answers, yes, we would look to defend it it isn't.

Got it.

And and then just moving on to trash market, so little bit more cause of no you mentioned that as a bit of alone bright spot and Q3.

You expect that to continue based on the visibility you see on those customers, which just based on their location or a little bit tougher for us to look into even given the challenging sort of commodity environment at the moment is double digit top one girl for international segment unrealistic or or is it within reach.

I don't think it's it's a realistic looking forward, especially given the importance of arch in T. nine our international portfolio. The recent elections in Argentina have created some uncertainty and probably negative pressure I'm drooling activity down into short term. So I do not expect to continue the growth that you have seen here over the last year or two.

<unk> okay. Thanks in that color that's it for me thanks again.

I think Greg.

Next question comes from Dane their luck with C.I.B.C. capital markets.

My name or so morning, John .

Right.

So nice to see some or kutcher gained from the U.S. was that a function of an incremental customer winter was <unk> largely just <unk> the quarter.

It was it makes us both I think increase penetration with one of our largest customers and activity levels between operators.

I'd be tilting in our favorite both played a role.

Okay catch up and maybe just staying on the U.S. and kind of related I mean small decline in revenue per E.D.R. days sequentially can you may be just elaborate on in the moving pieces behind that.

So with the really fruity already there's there's a couple of things that play anytime we get into a a slow down in the overall industry customers become a little bit more cautious and and look for opportunities to reduce costs for they can and so that would have a resulted in in slightly lower adoption on some of the peripheral products and then to your.

Earlier question around going to just the mix of active customers. There are there are certain customers were the revenue opportunities are different based on the profile of their rigs or profiles of arrangements. We would have with them on technology arrangements et cetera. So sometimes those customers that are active the revenue opportunity isn't quite the same and that can put some pressure.

On revenue pre D.R.D. as well, if if a customer that we accrue a little bit less revenue was more active.

Gotcha, Okay, that's very helpful and and again, just it's with those customers that are maybe dropping some of the peripheral products. It's more of a function of them just trying to save costs are not them, taking maybe a competitors and bolted on or anything like that correct.

<unk> cause we're going to a competitive that would show up as market share. So it's <unk> a case of some of the peripherals when it shows up in revenue for E.D.R. day.

<unk> okay.

Moving on internationally can you give us a bit of an update specific to the Australian market and now look for 2020, I mean, obviously, it's been one of your guys a stronger areas, but any expectations for that to be more moderate moderate growth rate going forward, whether that be activity on are on a product adoption side.

If they said what we see today the expect the Australian market 10 dollar activity there to stay at the current high levels and to be able to maintain the currency high margins, but I don't think we'll see <unk> I've seen over the last couple of years.

Okay. Okay I understand that's helpful. All my other questions been answered. So that's all I have created the kind of guy so kind of back.

And once again, if you'd like to ask a question. Please press start from the number one on your telephone keypad and then the question from <unk> <unk> with P.M.P.

Morning, guys.

<unk>.

The changes and recount.

Quite differentiated.

Where you're out or where you may be stronger in certain basins rather than other mason.

Because that's the other part because I was going to be obviously play a big parking apart in market share is.

Good question I'm going to focus primarily on the U.S. in my comments theory and so.

<unk>.

I was going to say Oh advocate to the U.S. My bad Yeah, right [laughter]. So yes, the the activity declines in the U.S. across space and that's been highly on even I think leading the losses has been the mid continent. So the Oklahoma area the <unk>.

Diverse some declines on the permission about much less than the rest of the U.S.

This actually a aligns quite nicely with our area strengthened market share. So that made calling has long been one of our weaker ariosto their relative declines there has been hurting us less so to speak and the Permian capability and market share has been above average at least in in a more recent times. So that that's that's really.

It's been in our favor of it.

<unk>.

I go back in history, and this number maybe.

Field employees per rigs you like to have winter being candidate or in the U.S.

<unk>.

One.

<unk> has this has that metric change it all over the course of time with pad development or have you seen you change is there that helped the costs structure per se.

So I think that ratio would never have been 321, I think he was always close that at least as a target eight to 10 to one.

So I don't feel taking care of eight to 10, a rig it has no fundamentally changed with the move from too too bad.

But there is quite a bit of variability across different basins, given how quickly activity levels after changed.

Okay.

And with respect to the acquisitions ever made I I'm going to work under the assumption that you see a number of opportunities given the string for the balance sheet was there something different about these opportunities.

Or scale to a certain size they.

Provides a certain financial benefit relative to some other opportunities you may see or I guess, what was the difference with these.

Acquisitions, once commercial or you may be reached or nor scale.

So the key the key factor for us when when considering acquisitions has always been our our conviction that you're able to valued yeah, I I value to the assets via choir, and so we're talking about the completion face first vs been looking to enter certain aspects of the completion.

Space around based on match for several years.

Never really found a compelling asset or business wherever you thought <unk> understand but they're trying to do the really understand how we could help then I W.S. The first thing you really saw that was compelling <unk>, there's really something around the end to end state that management aspect of this as well as.

Our expertise in designing deploying and serve as being a rocket eyes to feel technology.

And through your question if every could really see that it could be material in terms of the overall magnitude off the opportunity a few years out. So if you achieve some kind of penetration off the the active completions Frakking fleet with that service it can be material to pace on in the median to longer term.

Similarly on pace on power right. It's obviously a longer term play it's up rather sets out that that that a lens here around to be have to be able you have to be convinced that based on our experience. Our expertise you can add value that that but still crucial.

And the felt that the combination of E.T.D.N. pace on power really fell quite unique in terms of <unk> and I don't want to create any expectations around the contribution during 2020 or 21 is the longer term way, but the hurdle at the lens has always been our ability to add value too.

We buy and then obviously the magnitude off the opportunity to medium term has to be substantial.

That's that's very helpful. That's it for me altering the call back or thank you very much. Thanks.

Thanks again once again, if you like ask a question. Please press star fun and we asked a question comes in front of laboratory anyone else reunions. Please go ahead.

Ah good morning gentleman.

Yeah.

I have three questions for you. The first one is how could be Albert his budget I've got your business in the near future.

I think the when you look at the budget, there's obviously a lot of things in there. The one area that specifically probably has an impact to pace on just given we have a a fairly reasonable sized r. and d. presence. If some of the changes that they would've made to the the shred credits the scientific research and development.

Development credits, which that going away would would have a little bit of a negative impact us on a cash taxes basis, but that's probably the only one that I would would call load as having a specific impact us and again, that's just given a bit more of our technology angle, but overall nothing but <unk>.

And.

Okay, and then my second questions and how do you feel towards company was like Houston oil and gas going out of business in Alberta.

<unk> the <unk>. The question was how do we feel about smaller companies going out of business in Alberta.

And I think we like all Burton's and all Canadians right. It's it's challenging to see any any company customer have a tough time in this environment. So.

Okay.

If twin 20 is going to be down year revenue wise for your company what measures would you put your company <unk> encounters such financial issues.

Vincent again, I'd sort of turned back to a question we were asked to a couple of.

Questionnaires ago around our our costs tend to be somewhat fixed and we tend to take a a medium term to view on these things and so I I think the implications for US. If revenue was down is that that earnings would be downs, but that we wouldn't be quite as responsive in terms of the cost side.

Okay.

Thank you very much.

<unk>.

If you'd like to ask a question place press start one on your <unk> wants to cannot start one to ask a question.

Yeah.

And we do not have any phone questions at this time I <unk>.

Thank you everybody at a great thing.

<unk> Conference calls thank you for participating you may now disconnect.