Q4 2019 Earnings Call
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Hello, and welcome to the pace on systems fourth quarter and full year results conference call.
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On systems, Inc. Please note that the advisories located at the end up the press release issued by pay some systems yesterday, which describes forward looking information certain information opposed the company that is discussed on today's call may constitute forward looking information additional information those pieces.
System includes the risk factors relates to the company can be found in its annual information form I would now, let's say hand, the call since over to your speaker today first helps our president and CEO. Thank you. Please go ahead.
Thank you good morning, and welcome to pace on fourth quarter 2019 conference call.
With me here in Calgary today, John favor, our Chief Financial Officer, I will start with the highlights of the fourth quarter, Sean will dive into the details of our financial performance.
I will close with a brief perspective on the outlook for the industry will pay song and he will then take any questions.
The price for almost doubled your T.I. crude oil remains between 50 and 60 U.S. always for most of your fourth quarter of 2019.
Most operators constrained yet p. capital spending within cash flows.
As a result, he sounds operating environment across North America deteriorated in the period.
Building industry activity decreased by 24% into United States and by 23% <unk>, Canada compared to the same period in 2018.
These headwinds your partially offset by higher activity in pay zones international markets market share gains into United States and continued growth in product penetration in all geographies.
Revenue per ERP for the quarter about 732, U.S. dollar said, United States, a 4% decrease from the fourth quarter of 2018.
$1292 in Canada, and 9% decrease.
Based on generated revenue of $68.4 million into period.
<unk>, 17% compared to the same quarter last year.
Adjusted EBITDA was 20 $26.6 billion for the quarter.
<unk>, 32%.
Adjusted EBITDA as a percentage of revenue was 39% compared to 48% one year ago.
I think I was largely fixed cost structure.
Based on recorded net income for the quarter of $10.4 million down from $20.7 million into fourth quarter of 2018.
Capital expenditures for the quarter, this like $46 million and free cash flow.
Right.
There's.
At December 31st 2019.
Working capital position stood at $184 million, including cash and short term investments of $161 million.
Our maintaining our quarterly dividend at 19 cents per share.
Well now Curt turning to call overcome Shaw for a more detailed look at the financials.
Thank you Michelle.
Based on its fourth quarter results were impacted by reduced drilling activity in North American markets.
Consolidated revenue decreased 17% compared to the fourth quarter 2018.
James and revenue Brady our day in both Canada, and the United States helped to mitigate a 24% decrease in U.S. land drilling activity at a 23% activity decrease in Canada.
In the United States market share increased to 62% and revenue breed yardi increased by 4% just $732 per day.
In Canada, we saw revenue breed yardi increased 9% year over year to $1292, while reported market share decreased to 85% in the quarter.
On a sequential basis revenue Brady our day was slightly lower in both markets and Canadian market your increased well U.S. marketshare held relatively steady.
Our international business unit reported a 14% increase in revenue for the quarter. However, I would note that revenue was positively impacted by approximately $800000 in the quarter as a result of applying accounting for hyperinflation to our Argentinian subsidiary.
Adjusting for the impact of hyperinflation International revenue was up 5% in the quarter compared to the same quarter 2018.
Consolidated revenue of $68.4 million was down 5% sequentially from $72.2 million in the third quarter.
Drilling data remains our largest revenue category accounting for 53% 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 quarter with activity driven decrease was somewhat offset by increased adoption of certain peripheral products.
Communications revenue contributed 6% of revenue in the quarter revenue decrease in this category remains the largest owing to pricing changes affect that early in 2019 as well as a greater proportion of drilling activity in areas, where adoption rates for this category or lower.
Changes to our cost structure in this category through use of lower cost communications technologies have allowed us to protect category margins. Despite the revenue decrease.
Drilling intelligence revenue accounted for 7% the fourth quarter revenue revenue in this category decreased as a result of the overall decrease in North American land drilling activity.
The year over year revenue decrease was more significant than the United States, where the activity slowdown was most pronounced among mechanical rigs, which had a higher adoption rate of drilling intelligence products.
Revenue in our analytics and other category. It contains product and service offerings, which are less closely correlated to drilling activity.
Revenue in this category increased 21% year over year and represented 5% of total revenue.
Adjusted EBITDA for the fourth quarter of $26.6 million was down 32% from the fourth quarter of 2018 and down 15% sequentially from the third quarter.
For the full year adjusted EBITDA of $129.6 million was down 11% from 2018, well revenue was down 4% to $295.6 million.
Net income of $10.4 million for the fourth quarter or 12 cents per share was down 49% from the fourth quarter of 2018 and down 32% sequentially.
Full year 2019, net income of $53.8 million or 63 cents per share was down 15% from 2018.
Research and development expenses were relatively unchanged on both the year over year in sequential basis for the full year R&D expense increased by 13%.
The increase in R&D expense was driven largely by a greater proportion of total spending hitting the income statement.
Taking account of both R&D expense and capitalized development costs total spending increased by 2%.
Capital expenditures in 2019 totaled $24.2 million up 1% from 2018.
We expect capex to remain at a similar level in 2020.
Based on generated free cash flow with $20 million in the fourth quarter up 20% from the fourth quarter of 2018 and down $13.1 million sequentially.
2019 full year free cash flow of $86 million was up 1% from 2018.
In 2019, we acquired an 8% interest in energy tool base for U.S. $20 million and committed 25 million Canadian for a minority investment and intelligent wellhead systems 10 million of which was invested in 2019.
I'll now turn to a brief review of the results of each of our business units.
Our U.S. business unit revenue decreased 20% in the fourth quarter compared to the fourth quarter of 2018, driven by a 24% decrease in industry activity.
Marketshare was relatively unchanged on both a year over year end sequential basis, well revenue Brady our day increased 4% year over year in the fourth quarter with increased adoption of data delivery products and our drilling data category and certain peripheral products in or mud management and safety category, serving to offset declines in drilling intelligence driven.
By the disproportionate decline in mechanical rigs.
For the full year U.S. revenue of $202 million was down 1% from 2018.
Operating cost for the quarter decreased 3% year over year and sequentially in the U.S. as we adjusted to do you lowered drilling activity expectations in certain operating regions.
As a result segment gross profit for the U.S. business unit decreased by 36% to $20.5 million in the fourth quarter.
Gross profit of $105.3 million for the full year was down 9% from 2018.
The Canadian business unit continued to perform admirably in the context of challenging industry conditions in the fourth quarter.
Okay sounds revenue for the quarter was 21% lower than in 2018, well industry activity was down 23% for the same period.
The full year, 830% decrease in industry activity drove a 23% decrease in revenue.
In previous quarterly calls, we noted that we expected the greater proportion of cost focus operators in the active customer mix to result in downward pressure on market share, while new product and service offerings provided support to revenue Brady RJ.
Those trends continued in the quarter, where market share of 85% was down from 91% in the fourth quarter of 2018, well quarterly revenue freed yard day was up 9% from prior year levels.
We continue to expect market share will be more volatile than years past, owing to the proportionate impact of the gain or loss of any one rig within the context of lower industry activity.
Sequentially revenue increased 3% in Canada.
Operating costs were down 22% in Canada in the fourth quarter and 20% on a year to date basis, largely as a result of reduced purchasing costs in our communications category.
Segment gross profit for the Canadian business unit $4.5 million was down 47% from the fourth quarter 2018, and full year gross profit of $17.5 million was down 43%.
Our international business units are good year over year growth in the fourth quarter.
In reviewing the results of our international business I would note that Argentina is our largest operating region in this business unit and I wouldn't draw your attention to the commentary in or Mdna filed on SEDAR, which dot details the impact of accounting for hyperinflation on a quarterly and annual financial results.
Reported revenue of $10 million was up 14% from the fourth quarter 2018.
For the full year reported revenue was up 24% to $37.7 million.
Quarterly segment gross profit in the international business unit of $2.7 million was up 5% from a year ago, well full year gross profit of $12 million was up $4.2 million from 2018 levels.
Based on 2019 results reflect continued outperformance in the context of challenging industry conditions.
We are defending our strong market positions, while seeking opportunities to grow revenue Brady our day through delivering enhanced functionality to our customers.
We continue to prudently manage both our operating costs and capital expenditures with a view to sustaining our profitability without impairing our ability to fully participate when industry conditions improve.
We returned 80 $787 million to shareholders in 2019 $63 million through a regular dividend and $24 million through share repurchases.
We're maintaining our regular quarterly dividend at 19 cents per share.
We invested $34 million in the year to strategically position ourselves for medium to longer term growth through investments in energy tool base and intelligent wellhead systems.
Our balance sheet remains strong at December 31st we had $184 million of positive working capital, including $161 million of cash and no interest bearing debt.
I'll now turn the call back to Marcel for his comments on our outlook.
Thank you John.
We believe that capital discipline by our customers will remain at prevailing scene in the North American land market going forward.
The United States, you expect industry activity for the year to be similar to that experienced during the second half of 2019.
Yes, you would imply a modest increase from current levels.
Canadian drilling activity has started twentytwenty significantly ahead of expectations.
However, I don't I don't need to tell you that there is currently massive uncertainty regarding potential demand impact from cobot, 19, and the resulting trajectory for oil and gas prices.
In this environment, we are maintaining flexibility for our go forward plans, which gives us the means and confidence to address any activity scenario.
Our capital expenditures will be relatively modest going forward with a large portion of development efforts focused on software.
As John pointed out we intend to spend up to $25 million in capital expenditures in Twentytwenty, which includes the capitalize portion of R&D.
Our new product offerings continue to gain momentum with customers.
Datalink based on data delivery solution for automated delivery of large and complex. They thought that's from the field to corporate databases and applications is currently being utilized on over 300 active drilling rigs.
Exxon Mobil Das plus all driller basis, excluding automation software package has been deployed on over 270 drilling rigs were construction of over 1700 oil and gas wells since launch.
[noise] drilling performance is improving considerably and you optimization system is used in terms of higher rate of penetration that means faster drilling and many nice amici vibrations, leading to longer life of the drill bit.
We expect to be able to deliver growth higher product adoption going forward.
As John John highlighted as well in September 2000, 19000 acquisition over 80% interesting energy to base or eat TB, a U.S. based software as a service company.
EDI provides an industry leading software package to model of the economics and build proposals for solar energy storage that is battery projects.
You TV product is utilized by distributed energy project developers, primarily in the United States. There currently 1100 Act if he software licenses with 1800 users and the numbers continue to grow.
Over the past two years pace on power has been building a foundation into solar energy storage markets.
Yeah, Thats control system, and the energy data hub product.
With the combined capabilities a face on power and eat TV, we are positioning ourselves for meaningful long term growth into solar energy storage market.
We remain focused on maintaining our distinctive technology position and unique capabilities that.
Based on highly capable and flexible IDN communications platforms and host additional new pace on and therapies third party software in the field and into cloud.
Our service capabilities, our unrivaled as our expertise in user interface design and rocket innovation or feel users.
The strength, along with our exceptional workforce and strong balance sheet artifact nation for our ability to continue to deliver significant value to our customers and achieve long term success.
It would not be happy to take any questions.
Well ask a question. Please press star one on your telephone keypad.
The first question comes from Alex Mashinsky, you'll Miss an asset management. Please go ahead. Your line is open.
Yes, good morning.
Morning.
Good morning, the first one on on the capital allocation front, obviously, you know you've done two acquisitions. This year one is outside of your core business.
I would argue you know your shares are trading at Keno.
Well, it's a pretty attractive levels, how how are you thinking about capital allocation on a go forward basis, given you know the net cash on your balance sheet. How attractive you know your shares are in relation to prices of potential acquisitions. That's number one number two I can you just remind us of the levers you have.
So if you know activity continues to slow to adjust your cost base to a slowing environment. Thank you.
Sure Hi, Alex it's John.
First a question on the capital allocation side I think our capital allocation has been fairly consistent for quite a bit of time here, where you know obviously, there's the organic Capex program, where we've talked about up to $25 million in 2020, the maintenance of the regular dividends continues to to be a priority and that's in the order of mid Sixty's.
Millions of dollars and then we've been more active on these share repurchases in the fourth quarter and continue to look at share repurchases as an attractive.
Form of capital allocation.
And as well as you noted we made a couple of investments both the acquisition of 80% of VTB at a minority investment in a intelligent wellhead systems.
Note in the financials that that investment denied intelligent wellhead systems does involve future.
Capital investments, so about 25 million wasn't an upfront commitment 10 million to meet that was made in 2019 and so there'll be further.
Allocation of capital to that and as well both of those are fairly early stage entities that we expect to have some amount of operating losses to to fund over the next couple of years.
So that would you another form we would always look at things on the M&A side that we continue I can see as attractive but that would have to pass a fairly high strategic hurdle not just on the financial side.
So it's something that capital allocation hasn't really changed very much more so than we have much to add to capital allocation question I was going to take the second one sure. Okay go ahead.
So all the questions the levers we have a is.
Activity continues to deteriorate significantly.
As you pointed out in our remarks earlier I thought the our our cost basis it.
The significant degree at least in the short term and it's primarily compensation related costs that we don't have that much in do we have purchased costs that are really three groups of employees. We have five pays off the field services organization, RMD and Ikea and all other and.
I think at this point youre not ready to two two meant to make any any cost in this space, we don't think thats necessary, but I would like to point out that if you look at the last significant downturn in 2015, and 16 based on what able to stay free cash flow positive before to dividend every single quarter.
Yeah, I guess, the only thing I'd add about Alex's you when you talk about the available levers and we talked about this on the last conference call as well, we took significant cost out of the system in the early part of the downturn. So in through 15, and 16 that we didnt reintroduce as things, we're getting better and so we continue to have a very lean.
Organization and continue to retain some capacity to to absorb activity increases in areas, where we think you activity increases would show up.
Okay. Thank you.
Thanks, very much for your questions.
Your next question comes from Matthew weeks Industrial Alliance Securities. Please go ahead. Your line is open.
Good morning.
Good morning.
I'm sorry, just wanted to start kind of zeroing on U.S. margins, a little bit it was mentioned in the mdna that.
Costs in that segment.
I would have been lower if it if it weren't for the.
Energy tool based kind of piece on power results and as well as FX.
I was just wondering going forward.
Is that mostly due to kind of onetime integration costs of energy tool base or as you pursue more growth in this area is this the kind of cost structure, we can expect a little bit going forward.
Yeah, I don't think we'd expect many changes to the cost structure going forward I think that comment would simply reflect the and I mentioned earlier that we would have little bit higher cost and revenue in the the energy tool based side of the business today and so when we take on that that business. We would continue to see that that would continue a little bit.
I don't think of any significant change there.
Okay. So there were kind of some some impacts from integration a little bit in the quarter, then just to be clear.
Well, but I would say that that's just the impact of that organization growing a little bit by virtue of combining the two entities.
I wasn't any integration specific cost do you have some impact of integration specific cost in corporate services that relates to transaction in terms of legal fees and other advisory advisory fees not nothing to U.S. business unit specifically.
Okay.
No that makes sense.
That's it for me thank you.
Thanks, Matt.
Thanks.
Next question comes from Michael Robertson of National Bank Financial. Please go ahead. Your line is open.
Hey, good morning, Genset. Thanks for taking my call a couple quick ones here I understand the put options related to the Ws transaction are exercisable at their discretion, but do you have a best guess of the ballpark timing for the remaining to put options would you think that'd be like a 2020 event or 2021.
So you'll note in the subsequent events Michael that they have a I've spent does notice on one of the put options already yeah, and I think sort of the way that business appears to be unfolding. We would expect we may see another one later this year.
So that's why I would anticipate potentially two of three today based on what I would know being in $2020 into further and 21, Okay. That's very helpful and last one we're noticing some interesting revenue growth for the analytics Division.
That is small and I understand there's some lumpiness in Q4, given the TV acquisition, but it's interesting. Nonetheless is it's a stand out relative to the other segments could you provide any color or extra color on what's driving not because there's something particular, that's gaining traction or is it just that it's less correlated to industry drilling activity.
Although the main driver is that it's less correlated to that I think the specific increase is related to grant battle, our analytics company here in Canada.
They are able to show some growth year over year.
On the revenue so now I I wouldn't necessarily.
Create an expectation given the Canadian environment at their operating aimed at that.
That's sustainable going forward that growth rate.
The main driver here, both growth and Vidaza revenue.
Got it alright, well, thanks, a lot I'll turn it back.
Okay perfect. Thanks, Michael.
Your next question comes from Dana I Love to see RBC capital markets. Please go ahead, Sir your line is open.
Morning, where sell morning John.
Okay.
So I guess I'll start off you know nice to see continued improvement from product adoption in that translate to higher revenue per EDI every day, but maybe just thinking about a bit of a headwind made me on that side of things you know, but the heightened focus among your clients live within cash flow I think we talked a little bit before about you know possibility of certain clients from moving one or two products when they pay some bill in order to save.
Cost if that happened much to Q4 and have you seen any that in Q1.
We would have seen that as one of the the headwinds to revenue breed yesterday's you say so we we tend to work with clients in terms of their total spend when they want to sort of engaged in conversations around kind of pricing. We'll also look at the adoption question and see if there's parts of the product mix that we might be able to streamline with them.
Gotcha, So and then fair to say that that unfolded kind of how you expected no surprises and there's enough you know adoption and with other clients that have offset that.
That would be truth today, no is the continued to sort of based happens in the market of course that becomes more challenging to sort of see or even mean growth in or even maintain the revenue pre DRD. Aside. These option question does become more of a challenge more challenging environments.
Fair enough. Okay. That's good color. Thank you.
Thoughts around allocation to the into <unk> and do you see her spend in Q4, something we should expect to carry over into 2020.
Well, we did see opportunities sort of following mid November you know the share price a weekend and gave us opportunities to repurchase some shares I think we would continue to look to be active on the Unsi IB, but as you can appreciate those real time commentary here around what markets are doing in the face of Colgate 19 will probably.
We want to sort of get a sense of what the market is doing before we get to get too aggressive, but clearly we see the shares is being attractive as somebody mentioned earlier.
Right right absolutely no that's not makes perfect sense.
Specific to your disclosure you provided an energy tool base are able to share the cadence through growth and that software licenses. I mean, you mentioned the 1100 active licenses wherever that number have been when you acquired your stake in any comments you can say on your expectations around Brady growth.
I don't think we want to disclose that quite yet for competitive reasons and I Ah. So no I think maybe.
And the information at this close is probably as far as of year, we're able to go today.
Yep, that's something that's understandable I might ask but nonetheless, but last one from me guys. You know given given the two recent acquisitions I mean, how should we be thinking about your annual R&D spend is it's like a 40 million plus kind of the right right number to be thinking.
The numbers, we would've had in the fourth quarter now are fairly reflective of where we're at now when you roll into a new year, there's a little bit of inflationary pressures on compensation, which is a substantial portion of that cost base, but the the fourth quarter would have reflected both the EGD side.
As well as that migration, we'd made towards more opex based investments on the ITC side. So I'd say the with a slight inflationary pressures that the fourth quarter is pretty good run rate.
Perfect. Okay amazed that makes perfect sense. Thank you guys I'll turn the call back.
Hi, Jason.
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