Q1 2020 Earnings Call
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Systems, Inc. Please note the advisories located at the end of the press release issued by pay some systems yesterday, which describe forward looking information certain information about the company that as discussed on today's call may constitute forward looking information.
Additional information about pace on systems, including the risk factors relevant to the company can be found in its annual information form I.
I would now like the hand, the conference over to your Speaker today, Marcel Kessler, President and CEO. Thank you. Please go ahead Sir.
Good morning, and welcome to pay zones first quarter Twentytwenty conference call.
With me here in Calgary, today's chalk Baker, our Chief Financial Officer.
I will start with the highlights off the first quarter John go back into the details of our financial performance I will close with a brief perspective on the outlook for the industry and for pay song and people Dan take any questions.
The first quarter of Twentytwenty started relatively strong.
Precedented impact of corporate 19 on global oil demand not yet clear.
As most of you will know that's the global economy by shutting down a disagreement between Russia, and Saudi Arabia over proposal for the production costs.
Led to an increase in supply at the burst possible time.
This resulted in a collapse of oil prices at the end of the first quarter 20, Tentwenty became anemic for the industry.
Accordingly pay sounds operating environment deteriorated in the period with drilling industry activity decreasing by 25% into United States, Our most important Gulf racing area.
This headwind was partially offset by 87% higher industry activity in Canada.
Market share gains in the United States and continued growth in product penetration in all geographies.
Revenue per easy Rd at very important metric for pay song increased in both the United States and in Canada.
Based on generated revenue of $74 million into period, a decrease of 10% compared to the same quarter last year.
Adjusted EBITDA was $33.3 million for the quarter decreased 18%.
Adjusted EBITDA out the percentage of revenue was 45% compared to 50% one year ago, highlighting hours, our largely fixed cost structure.
Net income attributable to pay software to quarter was 16.9 million dollar $4 million were 20 cents per share down from $19 million or 22 cents per share into first quarter of 29 tea.
Capital expenditures for the quarter were $3.1 million and free cash flow was $22.9 million.
At March 31st our working capital position stood at $208 million, including cash and short term investments of $170 million.
We are actively assessing an optimal cost structure and capital allocation strategy, including to levels or future dividends.
In order to balance based on its commitment to shareholder returns, while preserving our financial strength.
Based on Bill maintain the quarterly dividend to be paid on June 29 at 19 cents per share. However in light of the uncertainties related to corporate 19 and to significant neck and neck of the impact that the weak commodity price environment has on the outlook for the industry.
We currently intend to reduce the following quarterly dividend.
Back to be declared after the second quarter, two five cents per share.
I'll now turn to call over to John for a more detailed look at the financials.
Thank you myself.
Based on his first quarter financial results represent strong performance in the face of lower industry activity in our largest market the United States.
Consolidated revenue of $74 million was down 10% from the first quarter of 2019.
Sequentially revenue increased 8%, owing to the seasonality of Canadian drilling activity.
Adjusted EBITDA of $33.3 million, representing an adjusted EBITDA margin of 45% was down 18% from the prior year period and up 25% sequentially.
During the quarter pace on generated $22.9 million a free cash flow.
This represented a 22.5 million dollar increase from the first quarter of 2019.
Recall that first quarter 2019 results included the payment of a 15.3 million dollar withholding tax remelt melt as a result of a bilateral pricing arrangement with the IRS and sea Ray for which the company continues to carry an offsetting receivable them out on its balance sheet.
Net income attributable to pace on for the quarter of $16.9 million or 20 cents per share was down 11% from 2019 levels.
I will turn to review the financial results of each of our business units.
Drilling industry activity in the United States was down 25% from the first quarter of 2019.
Based on the revenue for the U.S. business unit of $45 million was down 17% from the prior year as a 300 basis point increase in market share and a 3% increase in revenue pre D.R.J. served to offset the lower industry activity.
You asked results were also positively impacted by a weaker Canadian dollar in the quarter.
Sequentially U.S. revenue increased 2%, despite a 6% decrease in industry activity driven by sequential increases in both market share and revenue briefly our day.
You Es segment gross profit decreased by 27% year over year to $22.4 million as a result of the revenue decreased and the company largely fixed cost structure.
Segment gross profit increased by 9% sequentially from the fourth quarter of 2019.
Our Canadian business units started 2020 with better than expected industry activity in the first part of the quarter and industry activity for the full quarter was 7% higher than in 2019.
Our Canadian revenue up $19.7 million mirrored the increase in industry activity and was also up 7% from 2019 or they 7% increase in revenue preordained offset a 550 basis point reduction in reported market share in the quarter.
Reported marketshare continues to be more volatile and heavily influenced by customer mix in light of lower drilling activity levels in Canada, and we expect that volatility will continue through the short and medium term.
Despite the year over year revenue increase cash operating costs were relatively unchanged and as a result segment gross profit increased 10% from the prior year to $9.1 million.
Sequentially Canadian results reflected the seasonality of the drilling industry in Canada.
Revenue increased 39% and segment gross profit increased 104% on a sequential basis.
International revenue of $9.2 million was relatively unchanged from the first quarter of 2019 and was down 7% sequentially from the fourth quarter 2019 as activity in most international markets, including Argentina in Australia slowed in the quarter.
Segment gross profit of $2.9 million was also relatively unchanged from the first quarter of 2019, while increasing 7% sequentially from the fourth quarter.
In summary, our financial results for the first quarter represented continued competitive strength in each of our operating segments.
We continue to carefully manage both our operating and capital cost outlays.
Capital expenditures in the first quarter totaled $3.1 million down 70% from the same quarter in 2019 and down $2.5 million sequentially from the fourth quarter.
In light of beyond precedent did pace of decrease in industry activity, owing to the effects of the cold bid 19 pandemic and global commodity prices, we're now expecting to spend approximately $10 million on capital expenditures in 2020 down $15 million from our prior expectation of a 25 million dollar capital program. This year.
This represents both lower maintenance capital spending reflective of a lower drilling activity as well as a deferral of certain capital programs, which we had anticipated beginning in 2020.
During the first quarter. We also satisfied the first to three put options held by intelligent wellhead systems at a cost of $5 million.
We allocated $3.8 million toward our normal course, issuer bid program and repurchased 422000 shares in the quarter.
We do not anticipate activity under the program in the near term as we prioritize balance sheet preservation through the current economic crisis facing our industry.
Concurrent with the release of our first quarter financials, we announced that we're maintaining our quarterly dividend at 19 cents per share for the dividend to be paid on June 29.
The aggregate dividend payment of approximately $16 million for the quarter is comparable to our first quarter net income and represents 70% of first quarter free cash flow.
Consistent with our prior generation or the balance sheet in the upcoming quarters. We currently intend to reduce our quarterly dividend to five cents per share beginning with the dividend expected to be declared after the second quarter.
As at March 31st we had positive working capital of $208 million, including $170 million of cash and cash equivalents.
As we enter a period of tremendous challenge and uncertainty and with significant dislocation likely to occur in our industry. We do so from a position of excellent competitive and financial strength and.
And I will now turn the call back to Marcel for his comments on our outlook.
Thank you John.
Based on its considered an essential service in the United States in Canada and in most of our international operating areas.
As such we continue to support drilling operations and technology solutions, providing valuable services to our customers and support the global energy industry.
The health and save you a fall based on stakeholders, our employees customers and vendors remain a top priority for us.
Accordingly, we have implemented additional policies and procedures to protect their wellbeing of all stakeholders.
To minimize the impact of corporate 19 on our ongoing operations, we began working remotely bare possible since March 16th.
We're very proud of how are people have responded in these challenging times.
Going forward pay somebody will continue to make operationally sound and fiscally conservative physicians to support our long term success.
In light of the uncertainties related to the outlook for industry activity pace on hasn't reassessed its cost structure as bill that's its capital expenditures for the remainder of Twentytwenty as John explained, we now intend to spend approximately $10 million and capital expenditures this year down from previously.
95 million.
We tend to make reductions to operating and other expenses during the second quarter, while retaining key capabilities key people and relationships to strengthen our competitive positioning to future.
We will allocate capital to safeguard the long term prospects of pace on scored building related business and of energy to base powerful tools into solar energy storage market.
The energy it World has been offended by two Twentytwenty oil Black Swan.
At demand collapse and to supply search through.
Survival has become the primary focus of many E N P and oilfield service companies.
Significantly reduce cash flows were every company in the industry, including pace on our unavoidable into short term.
However, this environment also provides an opportunity for the strongest companies such as pace onto become even stronger by lead drawing competition in terms of technology and service and opportunities may emerge over time to acquire high quality assets and business lines.
As the macro environment for oil corrects over the next two years to focus will again shifts to the long term future.
Based on built survive and be are confident that we will make it through this much better and stronger than many of our competitors and peers.
We will now be happy to take any questions.
Thank you as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound or hash key please standby, we compile the Q and a roster.
Your first question comes from the line of Greg Coleman from National Bank Financial Your line is open.
Yes.
Hi, Greg Good morning, Greg.
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Oh, sorry, Greg you are really breaking up.
You hear me now John.
Yes, we can.
Great.
So just wanted to start by talking about the dividend reduction and.
Where I wanted to.
Focus my questions on where the comparisons between now in 2016.
Because in 2015, 16 and that downturn, we didn't see any dividend reduction that we are seeing a dividend reduction and I'm curious what are the puts and takes that you are seeing that caused you to make that decision of of course looking at things like the rig counts your cash balance and then also a your thoughts on the best use of capital.
As we as we go forward through this this downturn.
Sure. Thanks, Greg It's John.
Maybe just to give a little bit of context around the dividend side. So we've often talked about the notion of the dividend. We always think about in the context of sort of free cash flow generation measured over a period of time and so on one hand, we look to the medium term and we start to think about an expectation of what industry activity might look.
Like on the once we get passed the worst part of the crisis and we think about a boat.
The an appropriate level of free cash flow to generate in that environment, and then look to whats an appropriate amount of that free cash flow to allocate towards a dividend versus having some flexibility on capital allocation as it relates to other accretive uses of cash rate relative to share repurchases or potential attractive M&A.
The other thing we look at is.
The level of cash consumption, we are likely to incur in the short term as we move toward medium term and I think what's very different this time versus 2016 is the industry activity has been decreasing much sharper is expected to trough much deeper may last longer.
Then we would have seen in that tough prior downturn and so well into 2015 in 2016 environment, we were able to maintain positive free cash flow before the dividends through that part of the cycle.
Very likely that we won't be able to.
Maintain similar free cash flow generation through the depth of different crisis.
Very concise. Thank you when I said, when you say unable to or possibly unable to maintain positive cash flow through the depth of the crisis.
I interpret depths to be possibly months or quarters, rather than interpreting that to be a situation, where you anticipate negative cash flow before dividend payment for so I'd say, a full year I suppose it depends on how long we stay down there.
Yes, we clearly think that when I talk with the depth of the trough that that maybe a quarter or Jim.
And it will take some time to work our way back from that of course.
Got it.
Shifting over again, a use of capital I suppose on the Capex side, you know you talked to the 10 million dollar level is that a level, which is at or below sort of a good run rate about four maintain maintenance cash flow.
Okay. So I'm just trying to get to feel for how long you could maintain at that level of necessary.
Again, when I talk about that we think about the medium term and scaling towards that kind of environment. I think about medium term environment 10 would be low it would be closer to maybe 15 and between now and then you may see you did have a ramp towards that so so 10, maybe a 2020 only type of event on Capex and maybe a little higher than that extra move into.
For the 15 type of run rate if that's the way the will ultimately plays out.
Got it and then shifting over a bit I mean, it to the revenue side.
As we often see with pace on as the rig counts falls the active rigs tend to be larger and more complex ones and your day rates rise and that's a impacts and we've seen in price previous downturns.
Is there any reason to believe that that impact will also be felt in the current downturn. When you look at the active rigs that are still running that you still have equipment on dead, we shouldn't see sort of a little bit of an offset as your average day rate per active rig increases because of the the average size as of rigs that you're operating on.
Greg its Marcel Yeah, we agree with your statement that the biggest most modern and best equipped the rig so we'll continue to drill here.
However, we also think that we will face unprecedented pricing pressures as at several drilling contractors and several pieces will fight for survival. So I wouldn't necessarily count on significant increases to written ERP as we go through this.
That's very good point.
And then the last one for me is on the cost side.
You know in your prepared remarks, you referenced the largely fixed cost structure.
We have other downturns other incrementals and Decrementals that we can use to kind of help map based on our own assumptions as to what the macro looks like can you. Please talk to us a little bit about how your cost structure has changed in the current today comparing the current downturns that sort of 2021 2019 to the prior ones 2016, and 15 would be.
What I would focus on entire <unk>, mainly just so we can try to understand if you would be a more or less variable cost structure versus the prior downturns.
Let me take a step back and talk a bit about how we think about the operating cost reductions and our cost base and I would compare to where it wasn't.
Prior to 2050, so the guiding principle for our upcoming cost reductions is to size the organization to be free cash flow positive in the medium term as John laid out in his remarks for the dividend.
We are not sizing the organization for do you expect a trough, which is probably several quarters here and we intend to fund operating cash consumption for several quarters from the balance sheet based on our current forecasts.
We believe this will allow us to react more quickly when viewed this do turns around and should give us a leg up on our competition in terms of technology and service.
Now to your question the magnitude of cost savings pace on can realize without impeding our long term prospects are likely smaller than or some other oilfield service companies for two reasons.
As you know our cost base is it's fixed with significant degree given to technology intensity of our business and secondly, we have in fact been running a fairly lean and tight ship since the last downturn in 2015 16.
And I know you you may hold off with the question or somebody else. Mike on can you give us a specific number as to what that operating cost reduction looks like and I'm not able to that today it would not be appropriate because we have not yet to come you indicated that internally.
So Greg maybe I'll just a few more comments on your question on how the cost structure comparison, what I think about the cost structure I, probably don't immediately distinguish between capex and opex because I tend to think about cash and so it looks like sort of broad beyond just the opex question clearly when we talk about capex.
Even in that normal medium term environment that we talk about it somebody maybe theoretical terms, but that 50 million capex that compares to kind of run rate capex prior to 2014 of $50 million to $70 million right. So there isn't does much available on the Capex lever.
Do you look at the Opex side, we've always talked about our biggest costs operating costs being people related costs and communications bandwidth no relative to the last downturn on the communications bandwidth costs. They are both significantly lower and more variable that anywhere in the last downturn as your Marcellus Thomas.
On the people related costs, we didnt really grow that very much from the reductions we've made in 15 and 16, so there isn't quite as much available there as well. So when you look at all but all of the cash leavers. Not also then comes back to the dividend question around balance sheet preservation.
And do retention of cash when you have less available on Capex and Opex as well. So is it sort of a holistic question you're asking.
Okay. Appreciate for those insights that helps out as we're talking about the downturn Marcel I don't want to puts you into a place where we're looking to get your internal forecast of what happened. This year. However, we all have or ideas and our forecast as to when when we could see a trough of activity.
Can you give us a rough idea.
Based on your current planning and how long you plan to fund operating Capex through through the balance sheet. You think we could start to see an inflection point, whether it's you know in the sense of a month or a quarter or year, just rough idea. So that we can watch what we think our macro is versus kind of how your behaviors.
Is shaking out.
Yes, the he expects the first quarter based on what we see today to be Q4 Twentytwenty.
And we expect to see a slow recovery starting in early 2021.
Got it and is that in conjunction with Capex projects from your customers and in the discussions with them or is that more based on your view of the macro and your understanding as to how that will shake out I.
I think it's more the latter at this point.
Excellent well that's it for me thanks for the thanks Mel.
Right.
Your next question comes from line of Dane Blue from Sea RBC capital markets. Your line is open.
Good morning, everyone.
Good morning day.
So without getting into specifics can you share any more color on what you're seeing out there for acquisition opportunities and would that have a lean towards oil and gas or elsewhere.
There's no specifics at this point my comments were purely in principle, writing any environments such as that.
The crisis extends in time as time goes on there is nothing specific for us to talk about today.
Okay have you seen Anil elevation, and then bounds of guys looking to maybe shopper businesses Secrets words you.
We haven't seen yet David people at this point are still very focused on sort of sort of the self help mechanisms and trying to get their physicians in the best other businesses in the best position possible, whether that's for running for the long term or trying to develop I think people are very very near term focus currently that will shift and we'll see opportunity show up that's another reason why Marcellus.
Tom Theres nothing specific to look out because it make people are still very internally focused at this point.
Okay Fair enough. Thank you how should we be thinking about R&D spending for the balance of the year and then kind of on the same topic is the current environment in the energy patch, causing you to shift your R&D focus away from the drilling rig at all.
So.
So the R&D spend that you've seen our financials actually includes all IP, which is through a significant.
Extent purchase cost, including 8000 to U.S. infrastructure cost et cetera, as well as R&D and then the R&D side.
Yes.
The R&D organization focused on supporting our customers with sustaining and evolving the current product suite and then of course, the new product team.
So we intend to a significant degree protect our investment in R&D and he and many of the comments I. My early it made earlier related to our significantly fixed cost structures actually relate to our ice tea and R&D spend.
I think we will continue to invest in and support our core business in the drilling on the drilling side going forward and vivo, obviously continue to farm and look to grow our step out into solar and energy into battery storage in the battery storage business energy to base. So we intent.
Allocate capital to both.
Okay understood. That's good color. Thank you and then I guess, maybe last one from me and you kind of already touched on it but just.
Broadly speaking how are your customers approach new one on pricing and then to kinda the offset product uptake I mean are you getting hit by to find where guys. There may be looking to take certain products off the rig as well as get pricing discounts.
Uh huh.
To some degree, but as you know right based on its actually a very small percentage of the cost to drill a well.
You order of 102%. So we are usually not the first the first the service that people go after at all and most operators in drilling contractors have just been so busy stacking rigs and seizing drilling operations. So to give you. An example on average.
In the U.S. via the indices Dolby stacking 100 rigs per hundred rigs are weak or more so in that environment detailed negotiations on price or.
Let's put up utilization has not really become a priority.
Right. Okay. That's a good point fair enough. That's all from me appreciate the color guys I'll turn call back.
Okay.
Again, if you like to ask a question. Please press star and the number one on your telephone keypad. Your next question comes from the line of Matthew weeks from Industrial Alliance. Your line is open.
Hi, good morning.
I do.
Hi, I think most of my questions have been answered at this point, but maybe just a little bit of clarification I just wanted to touch on something that was set earlier just clarify did I hear right. When you guys said that.
At this point based on your forecast looking at the near term, you're expecting Q4 to kind of be like the bottom the worst quarter.
That is probably what we'd be projecting yes.
Is that just based on.
You know conversations with saw with your with your customers.
You are going to kind of we look at.
Canada, we can expect things to be better out of out of the spring break up but.
Focusing on maybe the U.S. and internationally.
Our conversations there just kind of indicating that there is not really going to be a recovery.
Sort of through the second half of the year inside coated 19 restrictions ease up a little bit.
I think the challenge Matthew as we do we never have the long dated conversations with customers put as much as some of the people we might talk too on the drilling silent tend to be a little bit nearer term than the discussion our basis.
The fourth quarter likely being a worse.
It's really a view that of the absolute worst part of the demand impact where so much about these two blocks once the demand side driven by Govan 19 is likely to start to resolve.
Nearer term than the supply side and even the supply side will take some time to begin to resolve so the view that things start to get better through 2021 is really the demand being a little bit clearer and supply starting to resolve itself is a macro view more so than a lot of very specific customer conversations.
Okay.
Focusing on on costs, a little bit more and I won't I won't stay here too long because I know we've touched on it.
But looking historically at the way the fixed cost structure, where.
You can typically expect kind of somewhere in like a 70% to 80% range in terms of every incremental dollar revenue gained or lost essentially translates into about 70 cents.
To 80 cents of EBITDA.
In 2016 that was improved a little bit and it was only about 50 cents of EBIT Dr. lost revenue.
Kind of going into this year and going forward in the short term.
What what do you guys expect that to look like sort of that incremental hit to the bottom line from a loss in revenue.
So I think what I would suggest is coming out of the 16 environment.
The incrementals were much better than the 70% right, you'll recall, we had incremental sort of north of 90% and that's because we didnt reintroduced a lot of costs. So I would suggest that the detrimentals will now similarly be probably worse than the 70% that you would suggest for the same reason we don't have the same kind of cost to extract that we would have.
Back that based on not haven't reintroduced of and not much better incrementals.
Okay.
Okay that makes sense I think that's it for me Thanks, I'll turn it back.
Hey, Thanks. Thank you. Thank you.
Your next question comes from a line of Ian Gillies from Stifel. Your line is open.
Good morning, everyone.
What are your engine.
I.
I apologize if I missed this but the share buyback is being used to offset dilution I guess, the last couple quarters, maybe a bit more.
You know what's cast cash position, where it is are you still control trying to offset any shares that may go out the door moving forward or is that something that stops now too.
Oh, Yes, let me mention in the prepared remarks that we don't anticipate in the near term activity under the program.
Actually were at a stage now where it's really preserving capital and as things start to come back. That's a question that would be revisited by the board clearly, we have a little bit more flexibility around capital allocation with less obligation on the dividend side, but in the near term you shouldn't expect activity on the normal course issuer bid and maybe to add to that also at the current share price level. We are so far.
As far away from any option exercise price I don't think any dilution needs to be offset hearing to short term yes.
With respect to your international markets.
What's transpired there with customer conversations over the last month, I mean, we seem to be getting some different views, depending on which conference calls you're on.
Yes, great question, that's actually a very interesting area. So historically international activity has essentially mirrors North America, maybe somewhat less volatility usually the six to nine month delay. So if things go South and North America International business.
Usually follows about half a year later or maybe a bit more now we expect that to beat the case, you're also but in our various operating areas I think it very very very picture emerges certain countries certain areas, including Australia, and maybe the Andean region, our ads volatiles, if not more Andy.
Finding as quickly if not more than the U.S. and Canada.
On the other hand.
Area, where national oil companies are quite Collins, and where in some cases, even there's government support for oil prices like Argentina.
Expect drilling activity to opt to hold up much much better. So currently if you look at pace on international business. We expect these declines in the Andean, Mexico, and Australia, and we expect the reasonably steady activity in the middle East and in Argentina.
Thanks, Marseille, that's that's very helpful.
That's one from me.
John is are you able to provide any updated commentary based on your current outlook around how you're thinking about.
Taxes cash tax guidance and maybe if there's any large cash installments and need to be paid this year that result from profitability last year just area that's always a.
We can always use a bit to help.
Yeah, and so I guess coming into this year, we would have talked in previous conference calls about.
Having sort of largely absorbed the shields, we had in terms of operating losses in capex and those sorts of things, we'd largely exhausted those and so we're in physician were largely cash tax payable. So at this point cash taxes will not significantly differ from what you'd expect based on kind of the earnings before tax.
Okay. That's helpful.
Thanks, very much I'll turn the call back over.
Hi, Thank you and.
There are no further questions at this time, Mr. Marcellus Kessler I turn the call back over to you.
Thank you and thank you everyone wish everybody a nice weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Oh.
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