Q3 2020 Pason Systems Inc Earnings Call
Ladies and gentlemen, she operator chase call is scheduled to getting them in Chile.
Airlines will give me play sort of musical thank you for your picture.
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Systems Inc. third quarter 2020 earnings conference call all lines have been placed on each prevent any background noise.
The speakers remarks, there will be a question and answer session.
He would like to ask a question. During this time of the press Star then the number one on your telephone keypad interest likes withdraw your question press that sounds good. Thank you Mr. fabrics you may begin your conference.
Thank you.
Good morning, and welcome to pay songs third quarter 2020 conference call.
I'm joined today in Calgary by Dave Elliott, our Chief Financial Officer.
I will start with the highlights of the third quarter and Dave will provide a more detailed look at our financial performance.
I will then close with a brief perspective on the outlook for the industry and for pace on and we will then take any questions.
Industry conditions in the third quarter of 2020 were the most challenging that pay someone has faced in its history.
The ongoing global COVID-19 pandemic has had a devastating impacts both from a health and economic perspective.
Global oil demand remains below pre pandemic levels in the third quarter, though it has increased from its lowest point.
The North American land drilling rig count declined a further 25% from the second quarter and international activity also remained well below historical levels.
Compared to the prior year North American activity was down 72% as a result consolidated revenue for the third quarter and $23 million was down 68% from the third quarter of 2019.
The company posted an adjusted EBITDA loss of $1 million.
It is worth noting that the quarterly adjusted EBITDA loss was similar to that in the second quarter of 2016. Despite the fact that the North American land rig count was 35% lower in the third quarter of 2020.
This underscores how our competitive position has strengthened over the past four years as well as the adjustments we have made to our fixed cost base in response to lower levels of drilling activity.
Based on recorded a net loss for the period of $3.7 million or four cents per share.
Capital expenditures in the quarter totaled $807000 down 80% from the third quarter of 2019.
Full year capital expenditures in 2020 are expected to come in below $10 million and assuming rig counts do not meaningfully increase in 2021, we expect a similar level of capital expenditures next year.
Energy tool base, our emerging business into solar and energy storage market continues to leverage its leading economic modeling and proposal generation software package to generate additional sales of intelligent energy management control systems.
We are continuing to invest in providing a common plot platform for the modeling control and monitoring of solar and energy storage projects.
Hey, SUNS balance sheet remains strong with $169 million in cash and cash equivalents at the end of the third quarter.
And there is no interest bearing debt on our balance sheet.
In the third quarter, we consolidated our United States and Canadian operations into one North American business unit.
Under shared commercial and operational leadership, we're seeing benefits in terms of operating efficiencies and the management of important customer relationships.
As a result, beginning in the third quarter. We have started to report the results of our consolidated North American operations consistent with how we are managing the business.
We're also providing better visibility on the results of energy tool base in order to allow investors to better evaluate our progress in this area.
No I recognize the frustration of the investment community when companies all through their reporting segments or format.
We have provided a historical look at our performance under the new reporting segments on our website to assist with this transition.
That said focusing the management of our organization on the performance of the North American business unit, rather than individual regions will drive better business outcomes financial results and ultimately returns for investors.
Similarly, I expect there will be some investors who are disappointed that we have moved back to reporting revenue per industry day, rather than its individual components, namely market share and revenue per CDR day.
Ultimately revenue per industry day is more closely correlated with revenue generation than either of its individual components taken in isolation.
All businesses constantly have to navigate the balance between market share and customer spending, whether that's driven by pricing or product adoption.
Focusing on the outcome of those trade offs, rather than the individual metrics underlying it again drives better outcomes for the business and for investors.
Also I would note that there has long been significant differences in market share in Canada, and the United States.
As a result consolidated north American market share will be volatile based on their proportion of activity in each of those regions and there are different degrees of seasonality.
There is a meaningful risk that upward or downward movement in that more volatile pattern would be misinterpreted.
We will continue to provide commentary about the underlying drivers of revenue for industry day.
And with that context, I will now turn the call over to Dave for a more detailed look at the financials.
Thank you John Q.
Q3 consolidated results.
Based on third quarter financial results reflected drastic downturn in industrial activity as a result of the global supply demand in balance, resulting in a first for precipitous fall in the active rig count and all of the major markets. The company operates in.
Consolidated revenue was $23 million in the third quarter of 2020, a decrease of $49 million from the corresponding period in 2019.
Pace on posted an adjusted EBITDA loss of 1.1 million compared to positive adjusted EBITDA of $31.5 million in the third quarter of 2019.
Capital expenditures of 800000 were down 80% from the third quarter of 2019.
Free cash flow was 4.1 million in the third quarter 2020 compared to $33.1 million from the corresponding period in 2019.
This decrease is due to a $31.7 million reduction in cash from operating activities, partially offset by an 80% reduction in capital expenditures.
In the third quarter pace on recorded a net loss of $3.7 million or 4.8 cents per share.
Compared to net income of 15.4 million or 18 cents during the third quarter of 2019.
Year to date consolidated results on a year to date basis consolidated revenue totaled $123.9 million, a decrease of 45% from the prior year period.
Adjusted EBITDA for the nine month period was 31.3 million, a 70% decrease compared to 2019.
Free cash flow for the nine month period was $57 million, a 14% decrease compared to 2019, driven by a 27% reduction in cash from operating activities offer.
Offset by a 75% reduction in capital expenditures.
Net income attributable to paste on for the nine months ended September Thirtyth, 2020 was $8.7 million or 10 cents per share a decrease of 80% from the comparable period in 2019.
I will turn to review the financial results of each of our business units.
Profit of 2.9 in the third quarter of 2019.
On a year to date basis International business unit generated segment gross profit of 1.7 million compared to a 9.3 million segment gross profit.
Running the comparable period of 2019.
Solar energy storage beginning in this quarter, we are reporting the solar energy storage segment as its own business unit to allow investors to better evaluate our progress in this area and.
And prior quarters solar energy storage as part of the U S business unit.
Revenue generated by the solar energy storage business unit was zero point $9 million in the third quarter of 2020 compared to zero point $1 million during the 2019 comparative period.
Revenue in the third quarter of 2020 reflects revenue generated from energy tool based software, Inc, or ETS. The company formed through the amalgamation of the former paste on power entity and energy tool base, LLC, which was acquired in 2019.
The revenue in the third quarter of 2019 was generated.
Only from pace on power.
The solar energy storage business unit generated a segment gross loss of zero point $5 million in the third quarter of 2020 compared to a segment gross loss of zero point $3 million during the third quarter of 2019.
Capital allocation and balance sheet and summary, our financial results for the third quarter were were reflective of the challenging conditions, which continue to face our industry.
In that context, we continue to carefully manage both are operating and capital cost outweighs.
R capital expenditure in the third quarter was $800000 a decrease of 80% from the third quarter of 2019.
On a year to date basis, our capital expenditures were four 7 million Ah, 75% decrease from the comparable period last year.
We expect to spend up to $10 million on capital expenditures in 2020.
Appropriate management of our strong balance sheet remains our top priority to the current difficult economic crisis.
As as of September 30th 2020, we had positive working capital of $167 million, including $169 million of cash and cash equivalents on the balance sheet.
Our board of directors have declared a quarterly dividend five for sure.
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 to John for his closing comments and on our outlook.
Thank you Dave.
While we have been encouraged by the gradual increase in rig counts over the past few weeks, we continue to expect low levels activity to persist through the remainder of the year and for the first half of 2021.
The consensus of industry forecast calls for rig activity to double by the end of 2021, but significant uncertainty remains in the near term.
Further waves of Covid cases are likely to negatively impact oil demand.
[noise] supplier uncertainty persists around OPEC compliance with agreed production levels.
In recent weeks significant M&A transactions have been announced among E&P companies and we expect the industry to continue to consolidate both through further M&A activity and with companies exiting the market due to financial distress.
We expect that as the drilling industry recovers it will be characterized by a smaller number of companies and those companies will have a heightened focused on technology initiatives.
As a result, we have made the conscious decision to retain critical technology development and service capabilities that will allow pace on to retain our strong competitive position.
This decision puts pressure on near term financial results as it serves to increase our operating leverage. However, history has shown that competitive gaps tend to expand the most and persist the longest based on relative levels of investment through times of crisis.
Patient on as fortunate that it's financial stewardship throughout its history allows us to make appropriate investments through downturns to strengthen our position.
We expect to be able to absorb much of the growth and medium term forecast of industry activity within our existing operating cost structure, while meaningful growth could push capital expenditures above 2020 levels to those more similar to what we spent in 2019.
Our strategy remains sound, we continue to see opportunities for growth both within our core drilling and market as it recovers as well as from our investments in the completion space through a minority investment intelligent wellhead systems.
And in the solar energy storage space through energy tool base.
I have been honored to be part of this great company for the vast past six and a half years and I'm humbled to be asked to lead the organization as its next president and Chief Executive Officer.
Surrounded by an exceptional leadership team and hundreds of talented and dedicated pace on employees I remain confident in our ability to tackle the challenges, we encounter and to seize on attractive opportunities as they present themselves.
I am grateful for the support of our employees, our customers or suppliers are shareholders and our board, whose confidence we all work to earn each and every day.
We recently announced that Celine Boston will be joining us as peso on his next Chinese Chief Financial Officer later this month.
Before I close off and take questions I want to take a moment to acknowledge my friend and colleague Dave Elliot who is currently serving as our Chief Financial Officer.
Dave has been with paste on for 14 years, and I have had the pleasure of partnering with him for almost half of that time.
Every great CEO will tell you that one of the keys to success is to have a great CFO.
And every great CFO will tell you that one of the keys to success is to have a great VP finance our controller.
With Dave I've had the good fortune to have had both of those experiences.
Those who know Dave while Mulder two sets of numbers he cares deeply about pathos financial results and his golf scores.
We share common aspirations with Dave that in the years ahead pay.
Based on financial results will continually increase while his golf scores will continually decrease.
Well they will be with pace on for a number of months yet this will be his last conference call and as such on behalf of all those on this call I want to extend our best wishes for a healthy and happy retirement to Dave and with that we would now be happy to take any questions.
As a reminder, if you'd like to ask a question. Please press star and the number one on your telephone keypad that is star one to ask an audio question.
On your first question comes from Michael Robertson.
Hey, good morning, John day, Thanks for taking my call.
Couple of quick ones here, the net cash position decreased by a little over 7 million sequentially.
Hopefully we've worked our way through the worst of the industry activity level impacted the pandemic at this point, but hypothetically speaking.
Cigna again demand ramifications from a second or third wave of COVID-19, how long would you be comfortable maintaining the dividend at current levels of blood counts failed to recover it all more sustainable levels, when we're coming quarters.
Thanks, Mike Good question, you'll recall, when we talked about reducing the dividend earlier.
We talked about the the notion that we had taken to sort of a medium term forecast of how we thought the the drilling industry may shape up and we had really size, both the cost structure and the dividend to to that sort of an environment and then did a look at how much cash we thought we might consume on our way toward that medium term and so.
<unk> I guess, what I would tell you as a couple of things is number one or medium term forecast hasn't changed we're still very confident that that's what the world ultimately looks like and while we recognize that there's a variety of scenarios that can play out here in the shorter term, we're quite comfortable with the dividend level, we sized it in any of those scenarios.
Got it got it got caller. Thank you.
You also noted an increase in market share offsetting revenue for Edr day. During the quarter are there particular regions are based on that stand out in terms of where you were increasing market share or is it more widespread and is it driven more by business with new clients or increasing business levels with existing clients.
So I guess, there's a couple of questions there.
If I think about the regions I would say, it's only regional and that the activity has become more regional I don't think there's anything unique about specific regions.
It's a mix quite frankly of work with existing customers as well as a couple of new client our customers. There's also of course the question around the the relative proportion of the market that our customers represent so I think all three of those actually would've played into the the market share site.
Got it alright, well, thanks for taking my questions and being a good luck chicken white that handicap.
Thanks, Michael takes Michael.
Operator will take the next question.
Your next question comes from each Mackie.
Hi, good morning, Thanks for taking my questions.
Or in case.
Just on the first one so the north American.
Rental and services and local admin expense actually did quite well no doubt, reflecting some of the changes you've recently made to the business. Just wondering if that tend to $11 million is kind of a new baseline, where we should expect to jump off from or or would that.
Would that would that shift around as revenue changes.
From Q3 to queue for and into the latter half of 2021.
It'll shift around a little bit Keith.
The cost structure as you know as a significant amount of fixed costs and it now that's not to say there are no variable costs.
And so I kind of harken back to a comment I made in the previous downturn, we're coming off of the bottom we felt like we could absorb anywhere from $50 million to $100 million of additional revenue at north of 75% incremental adjusted EBITDA margins, Ed I don't want to sound like a broken record I actually feel quite similar in the current environment that we would have very.
Large.
Just that EBITDA incremental margins coming on the upswing, but there would be some operating cost I would come back on a variable basis.
Got it okay.
Makes sense and just just one that kind of caught my eye from from a comment you made sort of near the end of your prepared remarks about being prepared for attractive opportunities as they may present themselves.
Do you foresee that being more organic or would you look at this point in the cycle to to augment your business with some inorganic opportunities as well.
I think there's going to be bold and I think we probably feel a little bit about better about the potential for inorganic opportunities. There's nothing we're looking at today, but I think the one thing we know when industries shrink significantly is that the universe of things you can look at Inorganically isn't just.
Distressed companies in good environments. It's actually companies that are are very good companies, but they become a little bit maybe subscale based on the size of the industry and there's opportunities for us to say, how do we leverage our footprint and are fixed cost base. If you think of it from a financial perspective to actually absorb some of of what those are.
There are companies might be doing and so I think there's might be some opportunities, but there's nothing specifically we're looking at today.
Okay <unk>.
It for me Thank you very much.
Okay. Thanks Keith.
And your next question comes from call.
Yeah.
Hey morning Guys'.
When a call.
Uhm, so acknowledging into small pieces business right now, but just going back to energy tool base can you kind of share some of the metrics or maybe the strategy that you think about when you think about how to grow that business.
Yeah. So the business call is a couple of different things right, we talk about that sort of value chain on how we think about the the projects both from the upfront modeling and proposal generation and that's the software package that energy tool base would have created and that we would have acquired.
You have a control system that controls the energy storage devices largely batteries.
In a production environment right and that's what pace on power was largely working on and then there's a monitoring aspect. Once you have this system in place to keep track of how the system is doing right. So the historical revenue and much of what you see is revenue today is really still the subscription business related to that modeling and proposal.
<unk> tool.
So when you talk about what are the paths for revenue growth from here part of it is continued feature development and customer base, then within that proposal tool and modeling tool. There's another piece there that we've started to see some traction on in terms of motivating the sale of control systems still through using that modeling tool as an upfront.
<unk> Chan.
Channel if you will and then there's the monitoring service that ultimately we think is available to so we kind of see three different revenue areas right. The continued growth either through future development or customer base expansion within the proposal tool. The continued sale and increased functionality and by extension price of the can.
Stroll system, and then they're provision of monitoring tools and services as well. So now all of that is.
Not going to be a 2021 event, but that's the past that we see if you've talked about growth and the revenue side.
Got it thanks, that's helpful color.
So clearly we are seeing more activity alright, so we are having more conversations round installs.
No I think the general feeling that the first half of 2021 is likely still to remain fairly depressed relative to how we would have seen the world pre pandemic is a widely held view right. So I think we're all very happy that things have gotten a little better than we expected and quite candidly call things never got as worse as we thought they might right. So we feel good on both of those sites.
But I, but I don't think our excitement is is quite that we're past this and we're moving on I think we we expect we're probably going to go sideways here in terms of activity for a little while before it starts to pick up in the second half of next year.
Gotcha Gotcha.
And as well so gas economics are obviously a lot better.
But we haven't really seen a ton of addition to their in the US any color you are willing to share on if you see some opportunities there in the near term or how you think that might play out.
I guess, what I would say as it relates to gas is that has always been a source of drilling activity that we see is underpinning some base level of activity right. So we feel good about the prospects and we've typically done very well in gas oriented basins now that's been more a question of where they're located as opposed to the commodity that comes out of them.
So that would be on balance a net positive for based on if gas activity was to continue to strengthen.
Got it that's all for me I'll turn it back thanks, Guising Congrats safe.
Thanks call please call.
As a reminder, if you would like to ask a question. Please press sky Congrats on retirement.
Again that is star one to ask an audio question.
Your next question comes from John Gibson.
Good morning, Thanks for taking my questions.
First off.
Pardon me.
No problem John Thanks for joining.
I'm not sure what that was there before me before I joined but and it was how are you prioritizing free cash flow and your daughter's cash balance going forward. This regarding potential dividend payments share buybacks and maybe further growth and your solar platform.
Yeah. So again, we talked about capital allocation around when we thought about the dividend also reiterate a lot of those comments.
First of all of course with a much much smaller industry free cash flow will likely be lower for the foreseeable period of time, which informed a lower dividend, but we also then brought the dividend to a point, where we felt that would be a lower percentage of free cash flow generation to allow ourselves a little bit more flexibility in terms of how we think about allocating capital too <unk>.
Horses are uses other than than the dividend right. So does the earlier comment or a question on the inorganic side I think there's actually two areas, where there could be inorganic opportunities John right I think the current environment in the the oil and gas complex.
They create opportunities wouldn't have existed in a larger environment based on attractive companies being subscale, so that could be very interesting.
And we've also said if we see the opportunity to bolster either the market's we serve the size of the customer base for the technology and services, we offer in that solar space. That's something we would look to do should opportunities show up there now as you can appreciate prices in that area have gone up a lot of late so <unk>.
Other place, we could do something resembling M&A of courses buying your own stock through repurchases and I think we've always looked at the repurchases as a more flexible mechanism floor return of capital to shareholders than the regular dividend, which is sort of a fixed amount of return to to shareholders and so I think we will continue to allocate between those two but <unk>.
Really with a little bit more preference done historically on the buyback side to allow more about flexibility around capital allocation.
Okay, Great. That's fair settlement for me just this is more of a high level. One if you look so look out sort of five years down the road.
How do you envision payphones revenue slipped between your core oil and gas offerings, and maybe other alternative business sections or solar platform.
Well I hope it will be higher than in all areas right now what exactly it will look like is very hard to forecast would you say, particularly in the core business. What's it going to look like five years from now right. We have talked about fairly openly a medium term view that something that looks like five to 600 rigs in the U S 100, or so rigs in Canada and <unk>.
Renewed growth on the international side.
So I think all of that would inform higher revenue in the core business, where clearly very excited about the opportunities in the solar energy storage space as we think across the different areas of revenue growth I would've talked about before but it is starting from a much much smaller space than the core business right. So I don't know that it's it's.
It's hard to know how exactly that will play out because it's a nascent industry today right, but it's hard to see that it is going to overwhelm the core business within the next three to five years, obviously, we'd be delighted to have both grew significantly.
Okay. That's fair and then just Lawson for me I know you've talked a little bit on this in your preamble can you just talk a little bit more on on recent M&A across North American.
Any sort of big move in market share you expect going forward.
Well I think the movement towards less companies more focused on technology will be a net positive for pace on in the medium to longer term right. The we have been growing our presence and credibility on the technology side with those largest customers over the last few years.
Ears, and I think those efforts will both continue and will show greater rewards as those larger companies become a larger share of the market right now.
The other side of that of course is that the does navigating the sales process with much larger companies is different right and so while we've been building that capability over the last couple of years. That's an area. We're going to have to continue to focus on right is how do we continue to sell to end service those customers. In addition to delivering the compelling technologies, but it's going.
Take all parts to continue to grow market share with a more concentrated set of larger customers.
Okay, Great I appreciate your responses and thanks, I'll turn it over.
Thanks, John.
And again it's.
Asking questions.
The number one.
Thank you Bob.
Star one.
This question comes from marking.
Hi, good morning, Thanks for taking my question.
Matthew.
I was wondering I know you guys don't look at it this way any more following the re segmentation, but I was just wondering if you would be able to break her part.
Market share look like in Canada versus the us in the quarter.
So yes, we do look at it that way, but we look at it that way the same way we look at market share in revenue per day in any region right. We look at the Permian, We look at the Rockies, we look at least.
Okay. The last so I.
I am not going to get into the specifics of any of the regions on the North American side, what I would say is that we would feel very good about our competitive position in all of the reasons. We operate in clearly market share did increase in the quarter.
So that it's not a question around the house the market share doing the market here is doing very well kind of everywhere. It's really a question of the what happens to market share based on the proportion of activity from Canada. In particular starts to really swing that number and that's why we say look we're going to focus on revenue for industry day, that's what ultimately.
Drives revenue.
Right Okay.
Thanks.
I was also wondering you saw a pretty good increased court on a quarter on quarter terms in the international segment kind of picking up in those regions a bit quicker than in North America as.
As we go forward here.
Are you continuing to see Directionally sort of added improvement in.
The international activity.
We are and so international is of course, a lot of different areas right. So the the biggest growth quarter over quarter in Latin America, South America would simply be the easing of Covid restrictions right. It was it was so slow in the second quarter as a result of of Covid effectively being completely lockdown that the relaxation of some.
Those restrictions would have driven growth on a quarter over quarter basis in South America now the other big region. We have is Australia in there to the earlier question around gas development. There's obviously a lot of of drilling the related to LNG on the Australia inside and there's been some significant announcements around further projects, there and that will stand too.
To benefit our Australian business. So we feel good about the international markets different drivers in different areas, but yeah, we would expect to see growth on the international side.
Okay. Thank you I appreciate you answering my questions.
Me I'll turn it back.
Great. Thank you very much.
And there are no further questions at this time.
Thank you very much we want to thank everybody for taking time to join US. This morning. We appreciate your continued interest in supportive Paste-on and we trust that in the weeks ahead. Each of you will stay safe and healthy.
We look forward to speaking again after the fourth quarter results and in the meantime, if you have any further questions. We always welcome. Your calls. Thank you very much and have a great day have a good day.
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