Q2 2020 Pason Systems Inc Earnings Call
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Contents of today's call.
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Thank you.
Good morning, and welcome to pay some second quarter Twentytwenty Conference call.
Here in Calgary, today's job favor, our chief financial Officer.
Let's start with the highlights of the second quarter.
John do I think to the details of our financial performance.
I will close with a brief perspective on the outlook for the industry and for pay song and to go bad take any questions.
Hi Darts.
The simultaneous drop in demand and increasing supply of crude oil towards the end of the first quarter up this year led to a dramatic declining oil prices.
As a result, we saw a large cuts to BNP capital expenditures with disproportionately higher costs for drilling and completion.
The number of land drilling rigs active across North America dropped by three quarters in just three months.
Activity drops across Latin America Merit, though within North America buybacks, PBT in Australia, and the middle East, but some bought more resilient.
He sounds second quarter financial results reflected extraordinarily challenging environment.
Revenue for the quarter was $26.8 million, a decrease of 63% from the second quarter of 2019.
The company posted an adjusted EBITDA loss of $848000.
Free cash flow decreased 8% to $30 million.
Based on recorded a net loss for the period, a $4.5 million or five cents per share.
In response to market conditions at the uncertainty regarding the trick trajectory about industry based on reduced capital expenditures by over 80% into second quarter compared to the previous here.
In addition, the executed significant operating expense reductions during the period.
Based on its balance sheet remains in pristine condition.
The result of to significant reductions in Capex since the release of working capital last the business Srecs during the period cash and short term investments increased from the first quarter and stood at $176 million on June Thirtyth.
There is no interest bearing debt on our balance sheet.
I'll now turn to call over to John where a more detailed look at the financials.
Thank you for ourselves.
Based on second quarter financial results reflected the drastic downturn it industry activity as a result of the global covert 19 pandemic.
North American drilling industry activity decreased by 64% from the second quarter of 2019, and many international Dark markets also saw significant activity decreases.
Consolidated revenue of $26.8 million was down 63% from the second quarter of 2019 and down 64% sequentially from the first quarter.
Based on posted an adjusted EBITDA loss of $848000 compared to positive adjusted EBITDA of $30.7 million in the second quarter of 2019 and $33.3 million into first quarter of 2020.
The notable items between the adjusted EBITDA loss in the quarter and positive EBITDA of $5.8 million, we're restructuring cost incurred in the quarter offset by government assistance programs related to the current pandemic and the previously announced termination of our lease in Colorado.
Capital expenditures of $800000 were down 81% from 2019 second quarter Capex of $4.2 million.
The significant reduction in capital expenditures together with a 25.5 million dollar decrease in working capital from the end of the first quarter contributed to free cash flow of $29.9 million in the quarter.
In the second quarter pace on recorded a $4.5 million net loss compared to net income of $9.2 million in the second quarter of 2019.
For the first half of the year consolidated revenue totaled $100.8 million down 35% from the prior year period.
Adjusted EBITDA for the six month period was $32.5 million, if 55% decrease compared to 2019.
Free cash flow of $52.8 million for the first half of 2020 was up 60% from the prior year driven by lower capital expenditures at or at least of working capital.
Net income attributable for pace on for the six months ended June Thirtyth 2020 of $12.4 million or 15 cents per share was down 56% from the comparable period a year ago.
I will turn to review the financial results of each of our business units.
Drilling industry activity in the United States was down 63% from the second quarter of 2019.
Sounds revenue for the U.S. business unit of $21.1 million was down 61% from the prior year.
280 basis point increase in marketshare, offset a 7% decrease in revenue Brady RJ.
Sequentially U.S. revenue decreased 53%.
You Es segment gross profit decreased by 82% from the second quarter of 2000 $19 million to $5.2 million as a result of the revenue decrease and the company's largely fixed cost structure.
Segment gross profit decreased by 77% sequentially from the first quarter.
In Canada, the year over year decrease in industry activity was more pronounced at 73%.
Result, Canadian revenue decreased 71% to $2.7 million in the second quarter.
Sequentially revenue was down 86% from the first quarter 2020.
Reported market share was 690 basis points higher year over year in the second quarter at 94% or revenue breed Yardi agreed decreased by 18% to $1060 per day.
During periods of very low oil and gas drilling activity the contribution of other drilling activity through our Canadian business unit distorts our reported metrics. Specifically these rigs served to increase reported market share well, putting downward pressure on reported revenue Fredy our day.
Year over year cash operating costs decreased by $2 million in the second quarter against the 6.5 million dollar revenue decrease.
As a result, the Canadian business unit posted a segment gross loss of $3.4 million.
For the six month period revenue decreased 19% to $22.4 million and segment gross profit decreased 35% to $5.7 million.
International revenue of $3 million was down 70% from the second quarter of 2019 and down 67% sequentially from the first quarter as many international markets saw significant decreases in drilling activity, most notably Argentina.
Revenue of $12.3 million for the first six months of the year was 36% lower than the same period of 2019.
Hey segment gross loss of $1.3 million during the quarter was down from segment gross profit of $3.4 million in the second quarter of 2019.
Year to date International business unit segment gross profit totaled $1.6 million down 75% from the prior year.
In summary, our financial results for the second quarter were reflective of the challenging conditions, which continued to face or industry.
In that context, we continue to carefully manage both are operating and capital cost outlays.
In the second quarter, we undertook a restructuring over business to adjust to anticipated lower activity levels for the foreseeable future.
Given the nature of our business and our cost structure, we're not scaling our business to match the anticipated trough levels of activity and a major strategic decision to retain critical organizational capabilities through the deepest depths of the current crisis in order to strengthen our competitive position that the industry recovers.
We reduced capital expenditures the $800000 into second quarter.
Yeah down 81% from 2019 levels.
We continue to expect we will spend up to $10 million on capital expenditures in 2020.
Appropriate management of our strong balance sheet remains our top priority through the current economic crisis.
Our board of directors has declared a quarterly dividend of five cents per share.
As at June Thirtyth, we had positive working capital of $182 million, including $176 million of cash and cash equivalents.
We expect to face extremely challenging industry conditions over the next few quarters. However, we do so from a position of excellent competitive and financial strength.
I will now turn the call back them ourselves for his comments on our outlook.
Thank you John.
As John alluded to the expected oilfield activity, especially in North America in South America, Bill remained very low in the second half of Twentytwenty before a slow recovery starts in 2021.
Our fully prepared for that we how're leaner organization and clean balance sheet based on is well positioned.
We will continue to allocate capital to safeguard the long term prospects. So based on core drilling related business and energy to base.
Our foothold into solar and energy storage market.
Our HDR market share in the United States is now firmly over 65% a great space to build from and industry recovers.
On the product side customers continue to be impressed with pace on das our drilling automation package drilling performance improved considerably Randy optimization system is used.
Our PBT smart alarms are gaining traction with key customers and the new data hub dashboard has been introduced with great feedback from users.
We continue to invest significant resources in R&D, I T and technical support to respond to customer requests improve existing products and develop new products.
We believe that this environment provides an opportunity for based on to become even stronger by leap frogging competition in terms of technology and service.
Energy to base has said and made has made good progress with positive momentum on software subscriptions and new battery control system sold.
With the industry, leading software package to match with the two multi economics and build proposals for solar and energy storage that means battery projects combined with the CMS control system and energy data how products.
Energy to base is well positioned for meaningful long term growth and this promising markets.
Finally, I should mention that this is my 36 and last quarterly baseline conference call.
On July 20 seconds.
Now that I will retire as president and CEO effective October onest.
I will succeed CIMB Hill as chair of our board of directors.
John favor has been a point has been appointed to succeed me in the CEO role.
John showing pace bonus Chief financial officer in 2014.
Over the past six years. In addition to the finance function. John has successfully led supply chain alrighty and important elements of software development.
I am fully confident that with our passionate employees on the Johnston Nations leadership, our unique platform and our financial strength based on will achieve long term success.
I'm humbled and grateful for the nine years, how about able to serve pace on us President and CEO and I look forward to continuing to support our great company as chair of the board.
It is worth mentioning at this point that none of the leadership changes were driven by the belief that the path to be wrong, or maybe you're allocating resources needs to change significantly at the result, we do not expect any abrupt changes to our strategy.
That said, we are living through unprecedented upheaval in our industry that is creating new challenges and new opportunities.
The we'll keep our finger on deposits, if our customers anti industry and react that's needed to counter these challenges and see attractive opportunities.
We would now be happy to take any questions.
Oh, I remind though so I'll stick with some you were moved to press star one on this and this one.
We call. Your question please press the pound.
Thanks, Tom by while we compile the Q1 in roster.
Your first question comes from Michael Robertson of National Bank Financial Your line is open.
Hey, good morning, Johnson, Mark or legacy.
Hey, John Congrats on your last fall and John Congrats you as long as appointments.
Yes.
He was market share has been creeping up over the last few quarters I just wanted to talk about the competitive landscape there.
Given the severity of the downturn and expected duration do you anticipate.
Somewhat less competitive environments coming out of the downturn is that happening already.
I'd love to hear your thoughts there.
So I think you're right Michael it's Marcel here.
Our market share in United States creep up, but it's probably not so much are result of ups, gaining new customers or new rigs, but it seems as if the financial strength of our customers seems to allow our customers to continue drilling bears come up our competitors seem to have a bit that weaker balance sheets soi it's simply.
Primarily a result of customer mix.
We do not really anticipate the competitive intensity in the United States to decrease.
Okay.
That's helpful answered thank you.
You had previously mentioned expectations for Q4 2020 as being the most challenging quarter for you guys.
I've got the viewpoint changed fundamentally or would you still sort of go with that or has it gotten better or worse.
I think it has not gotten worse I think our our perspective has probably shifted a bit in that the belief that drilling activity at least in North America real estate breed flat from where we are today. So based on what we can see today is we don't expect a further decline.
So I think yes, I think it's probably VR, we expect to be around the low point now.
Okay, let's let's get the here.
Last one for me just just one.
Ask how we should think about the the impact of the CEW less going forward.
Yeah, Michael it's it's John So those programs continue to be in place I think the only thing I would note is that given the timing of when they the program as announced in some uncertainty around who would qualify for what we did end up accruing the March payments in the second quarter. So we actually.
Four months accrued in the quarter as opposed to three and you'll I think that you would expect to be a little bit lower by virtue of the fact that we would have a slightly smaller employee base on the Canadian side today as well.
So I think that the bigger impact you. So short answer it will likely be a little lower going forward more so because we'd have three months accrued instead of for endo, some impact as well from a slightly smaller employee base got it well that's great. Thanks for the collar jobs and congrats again I'll turn it back.
Thanks, Michael.
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Your next question comes from MCU weak spots in both trouble I am I on Securities. Your line is open.
Hi, good morning.
Morning.
So looking at.
The cost savings.
Managed to achieve.
On the cost side and in terms of direct costs will not.
It was kind of.
The previous commentary what sort of that you know after the reductions made in the last downturn there probably wasn't as much to give this time around are you at all surprised by the.
You are able to kind of restructure on the cost side, when you kind of step back and looked at the organization.
I don't know what I'd say, we are necessarily surprised I think there's certainly different outlook or parts of the business, where we felt we had more degrees of freedom than some others perhaps.
And the other thing Thats course quite abnormal in a pandemic, particularly those that some cost which would otherwise be essentially fixed almost become variable through the the most deep deep as parts of the crisis, but I'd expect to build we look a bit more fixed again going forward. So there is probably that affected there as well.
Okay and looking at.
International revenue and the commentary was that for the most part in the quarter it was sort of mirror.
Activity in North America.
This is something that really you expect a kind of going forward with.
Checking a pretty slot market here kind of through the remainder of year also kind of expecting similar in the international markets and then a slow recovery in 2021.
Yes, so the international markets is a few different areas of course, right I would say that Saudi Arabia, and Australia would have been somewhat more resilient still down but more resilient and South America is in some countries was quite a bit slower than even north America more significant declines and given that.
The South American countries continue to be a larger part of our international business. We would expect that that would continue to be quite low for a while based on what we see today and again with that similar sort of trajectory and timeline that you mentioned, we would see on North American side.
Okay.
Thanks, any color on that I think that everything from me I'll turn it back.
Thank you.
Your next question comes from John Gibson of BMO capital markets. Your line is open.
Morning, guys.
Well John right John.
Historically, you've maintained a bit of a larger fixed cost base, who downturns in order to keep your service offering I know you touched about it in your Graham will there, but we've seen some commentary from producers the north American activity levels will be structurally going forward. So I guess my question is how much are you willing to sacrifice on the margin side I was in the short term to maintain a fairly large operating footprint and.
At what point would you look to reduce.
Parts in certain areas and then lastly, do share the view that north American will be or North America will be structurally lower going forward.
Well, maybe take those in reverse order. So the question do we shared the view that will be structurally lower I think what's your view that it will be structurally lower than it was coming into 2020, but not that it's going to stay at the current level right. So we do think it will improve from here, but likely not to call. It exit 2019 levels.
At any point in the foreseeable future right now the restructuring exercise we went through we really.
I would.
Imagine what that that lower than 2019, but better than today type of environment might look like.
And look to get an appropriate cost structure for that type of environment. So what I mentioned in the comments that we didnt sort of restructured the business to the trough.
We do expect we're going to consume some cash over the next few quarters through the depth of the crisis as we restore back to that.
I want to call it normalized environment, but it environment, that's better than today, but lower than exit 2019.
Okay, Great that answers my question like would you put a number on.
Where do you think the rig count will get back to I mean, I know, it's impossible to say below where wherever you.
I have structured your business I guess relative to exit 2019, though.
I think if you read a number of commentaries from people on the industry I see ranges anywhere from call. It four to 600, and we would sort of be consistent with that range right nobody's going to put a specific number but I think that's the type of range that we could see in the foreseeable future that's the appropriate planning horizon.
Okay that that answers my question.
Secondly, just on the pricing concessions can you give an order of magnitude and was this competitor or customer driven.
So to be clear John there wasn't that much in terms of new pricing concessions in the quarter. There certainly was some but what you see particularly on the Canadian slide is the disproportionate contribution of non oil and gas rigs.
And what you see on the U.S.. So I just more of a regional mix of where the activity slowdowns were so certain regions, where the rigs are drilling larger deeper more complex wells that tend to draw more pace on product those regions, what a slow down more significantly. So it's much more of the impact of mix than it would have been around.
Right, that's not to say the price Wasnt a factor, but the price is not very much of a factor relative to mix.
Great. Thanks, and then just lot lastly on the acquisition fronts have your plans changed a little bit and or in other words like do you expect to be less aggressive just going forward over the next few quarters as you do maybe burn a bit to capture.
Are you still looking at select opportunities in the same way.
Well, it's Mike Tom its were earlier, we're prioritizing careful management of the balance sheets through the depths I don't think we would do anything through the depth of the downturn, but we also think that opportunities that will present themselves coming out of the depths maybe unique opportunities to transact. So we would always be looking at potentially doing things, but I think the light.
Hey, good of doing anything in the depth is very very low.
Okay, great. Thanks loss and again congrats to you Marcel all the best in the future.
Thank you John.
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Your next question comes from Jeff steadily of Peterson Cool your line is often.
Morning, guys couple of clarification questions for you.
First on the Middle East side, you touched from a minute ago in terms of the resiliency in Saudi but where does your operational base for us would be sitting in the middle East today, and how has that been trending.
So that at least for US is really two very distinct businesses. The first one is Saudi Arabia itself ever your operating in a 50 50 joint venture with the local partner and Thats, where do you have seen most resiliency 40 overall drilling activity and four or four based on bid.
Yes, that's well now that said.
It was actually quite unprecedented that Saudi Aramco date decreased drilling some walked or it's going to which hasn't really happened in a long long time, but not nearly as what we would have seen in North America.
Or South America, and the rest of the Middle East the operate and where you want and you essentially called from tier where we primarily serve that through a small business development office.
Okay that in Dubai, but then the equipment dendritic nations are essentially deployed from North America. The from pure operation with no local infrastructure as such I think would cover markets, such as Oman, United Arab Emirates quite Iraq out out of that operation. So there's really no.
Fixed cost base associated with that as such and Thats, where you'd have seen much bigger declines more along the lines of what we've seen in North America.
And on the Saudis side from a market church standpoint, how have you been trending.
We have been trending up but the we have nowhere near the market share as what we would happen the U.S., Canada or Argentina.
Okay.
The second question on RW Us how has the commercial deployment going on box.
So I believe is just as a reminder for other people listening in is an investment be made last year, a it's a minority investment the happened that company.
It's a a revolutionary new technology for the completion space and as many of the people on the call. We'll know if anything completions will take even harder than drilling here in this downturn.
So the number of access system has gone down significantly or now that said the body fundamentally that that technology remain very valuable at the work flowing and able to is very important and that the medium to long term prospects are attractive for that business, but they have fallen pretty hard.
Times again, even harder than drilling really given this downturn.
Given given the completion crews are starting to react to be and obviously the cost. So consider units in the market is there a better opportunity today for market penetration with I'd be U.S. than you had seen in the past.
I believe so I think actually coming down of the downturn given there will be continued cost sensitivity I believe that it's actually probably a unique opportunity in time for I will do you asked to grow over the next year or two.
Okay.
And last question you, specifically referenced synergy tool boost from some of your prepared remarks, I'm curious if they're away that you see the ability to accelerate.
Energy tool base, especially given what's going on in some of the end markets that they serve.
The short answer is yes. It is a capital. It's a question of capital allocation, which are we're going to discuss the board and atrophy and we'll discuss here after the summer.
It is a complex based though so energy to basis, primarily active in the United States.
The regulatory environment, there are 50 quite distinct regulatory by my hands around our generation to use of unconventional incentives for selling back into the grid through wholesale markets or retail incentive. So it is not easy to essentially accelerate across the board. So you'll have to have.
Pick our spaces and should we see wherever you want to deploy how our skills.
Still a very small companies are traditionally to have been active primarily in California, and some others select markets in the southeast.
Now, they're looking to probably gain a foothold in the northeast, primarily Massachusetts, and New York, but it's it's almost the state by state employment at this stage.
And how broad from us overall coverage standpoint would energy tool business platform be in terms of states covered or market right now.
So there are there are several distinct offerings to TD, both the legacy TB software as a service platform, which is software used primarily by solar energy storage developers to model of the economics and build proposals for new projects or.
We're retrofits in some cases.
That is pretty evenly burst solely applicable across the United States and energy to base has as a quite that is thing scale essentially in having irrelevant the rate Harris for the various state utilities in their platform so that that is.
A couple of too many many states.
In terms of to control systems.
That's very gets a bit more complicated where add to control systems actually take charge of the battery charge weights or discharge. According to whatever objective asset on the rematch your has embedded at the NAND charge reduction.
Whether it be at time of he was optimization or whether it be to optimize some regulatory incentive in terms of providing power back to the great.
That's where sometimes customization is required so it really depends on the product.
Well just lost extension from but notwithstanding your comments John about protecting balance sheets through the downturn is there a need or desire or an opportunity to put some of your cash to work in this due to these existing investments in the near term.
Either either adding to your position in high W. us or accelerating anything on the TV sorry.
I would say, there's certainly a willingness.
Whether it's a need I guess it becomes a need when you see the right opportunity in those spaces, but clearly when we think about the medium to longer term and.
Where the businesses as opportunities to grow we have opportunities within the core business with the existing products, we with existing customers in existing markets.
As we start to talk with some of these other industries. There maybe things that we can do to flesh out either customer relationships product offerings markets, we serve et cetera, and so we would we would entertain those absolutely, but again I called a willingness as opposed to feeling it's a need at the current moment.
Okay.
For the color Mark So best of luck congratulations on the transition.
Thank you Jeff.
They're almost all my questions at this time, we turn the call back over to the present.
Thank you everybody and have a great weekend.
This concludes the conference. Thank you everyone you may now disconnect.
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