Q4 2020 Pason Systems Inc Earnings Call
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Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold and thank you for your patience.
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Good morning, My name is Amy and I will be your conference operator today at this time I would like to welcome everyone to the taste on systems, Inc. Fourth quarter 'twenty earnings conference call. The contents of today's call are protected by copyright and may not be reproduced without the prior written consent of pesos for Stephens Inc.
Please note the advisories located at the end of the press release issued by Pizza and systems yesterday, which describe forward looking information.
Certain information about the company that and discussed on today's call may constitute forward looking information.
Additional information about Paste-on systems, including the risk factors relevant to the company can be found in its annual information form.
John's paper, President and Chief Executive Officer, you May begin your conference.
Thank you Amy.
Good morning, and welcome to peso and its fourth quarter 2020 conference call.
I'm joined today, and Calgary by Saline and Boston peso and its Chief Financial Officer, who will start today's call with a detailed overview of our financial performance and the fourth quarter.
I will then provide a brief overview on the outlook for the industry and for pace on after which we will take any questions and I'll turn the call over to Selene.
Thanks, John and thanks to all those attending today's call.
'twenty and 'twenty was and immensely challenging year for pay for them for our employees, our customers our industry and our world for the ongoing and pockets of the COVID-19 pandemic.
Rig counts reached their lowest levels and pace on history, and we responded by adjusting our cost base to meet the level of activity, we expected and the medium term.
It's allowed us to retain critical technology development and service capabilities to ensure we would fully participate as the industry began to recover.
The fourth quarter continued to represent challenging industry conditions, although improved from the lows experienced and the third quarter with the recent macro developments and gradually improving rig count.
North American land drilling activity was down 58% from the fourth quarter of 2019, but improved by 34% sequentially from the third quarter.
Hey, Don generated consolidated revenue of 33 million and adjusted EBITDA of $8 2 million for 25% of revenue during the fourth quarter of 2020.
I'll start by providing further details on the Companys revenue by business unit.
Revenue for the North American business unit was $26 3 million, a decrease of 54% and the 2019 comparable period.
Our competitive position and North America remained strong despite the 58 per cent decline and drilling activity year over year revenue per industry day increased by 8%.
This was achieved through a combination of increased market share and continued traction with some of our newest automation and data delivery product offerings, and Q4 with improving activity levels.
It should be noted that we are comparatively higher market share and revenue per Edr day, and Canada. Therefore, our revenue per industry day metric will be seasonally higher at times when Canada is more active.
Revenue for the international business was $5 $7 million and the fourth quarter, a decrease of 42% from 2019 comparable period as activity levels in the company's international markets experienced similar reductions in activity witnessed and North America.
Energy tool they are emerging business and the 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 and control systems.
Reported revenue and this segment for 700000, and the fourth quarter and continues to be primarily comprised of subscription based software licenses for solar energy planning tools.
Well the number of accounts and the fourth quarter was consistent with Q4 2019, we saw a decrease and the average seats per accounts as customers scaled back spending during the pandemic.
On a consolidated basis paid down $33 million of revenue and the fourth quarter represented a 52% decrease over the comparable 2019 period and fourth quarter adjusted EBITDA of $8 2 million with a decrease of 69% over Q4 2019.
Sequentially fourth quarter revenue represented a 42 per cent increase from the lows experienced and the third quarter as rig counts and both in North American and international business units improved.
This improvement occurred we were able to absorb and much of the increased activity within our existing coffee.
Sequentially the benefits of our operating leverage through improving activity levels were evident as adjusted EBITDA improved by $9 3 million from the third quarter on a $9 7 million increase and revenue.
Incremental margins will fluctuate as the industry recovers, a certain costs and will be incurred and anticipation of future revenue increases and fourth quarter incremental margins likely represent the high end of the range, we may see on a quarterly basis.
Free cash flow and Q4 was negative $3 1 million driven by working capital investments and the quarter as the business recovered.
For the full year peso and generated consolidated revenue of 157 million and adjusted EBITDA of $39 5 million compared to revenue of $296 million and adjusted EBITDA of $130 million to $130 million and 2019.
We carefully managed capital expenditures during 2020 and reduced capex by 79% from 24.002 million 19 to 5.002 million 20, and response to lower activity levels and the ear.
With the benefit of pre pandemic first quarter results reduced capital expenditures and strong working capital release as the company diligently managed accounts receivable collections through the downturn free cash flow for the year came in at $54 million.
And 2020, we returned $50 million to shareholders through our quarterly dividend and share repurchases.
Our board of Directors has declared a quarterly dividend of <unk> <unk> per share payable on March 30th 2021.
It's on the balance sheet remains strong and incredibly well positioned with $149 million and cash and cash equivalents at the end of the year and no interest bearing debt and.
In summary, our fourth quarter results continue to reflect our strong market presence, our significant operating leverage given improving activity levels and a pristine balance sheet.
We are entering 2021 from a position of excellent competitive and financial strength.
I'll now turn the call back to John for his comments and our outlook.
Thank you for wind.
Drilling activity has continued to increase from the lows it hit in mid August.
Forecast for 2021 rig activity continued to vary.
Uncertainty remains as new variance of the COVID-19 virus emerge while at the same time vaccination rates increase.
There will likely be some short term impacts from the recent winter storm, which do stabilize the power grid and Texas.
OPEC production levels and compliance increasingly come into focus as a driver of oil supply as oil prices increase past $60, a barrel and the potential nuclear deal between the U S and do you Ron could return additional supply to the market.
U S production continues to be approximately 15% lower than pre pandemic levels a year ago.
The inventory of drilled but uncompleted wells and the United States has been steadily decreasing since the summer and is currently at levels last recorded and late 2018.
The EIA currently forecast global oil demand to grow by 5% to 6% in 2021 and to fully recover to pre pandemic levels in 2022.
Recovering demand will need to be met by additional supply and as a result consensus forecasts call for at least 500 to 600 land drilling rigs and the United States within the next two years.
We are able to absorb much of this increase within our existing cost base and should continue to post strong incremental margins as a result.
That said, while we recognize that our near term operating leverages attractive to investors during times of industry recovery, we remain focused first and foremost on longer term free cash flow generation and returns on invested capital.
As the industry continues to consolidate and focus and the adoption of technology to drive further increases in the efficiency and effectiveness of drilling operations peso and is well positioned to benefit.
We see opportunities to generate additional revenue through increased R&D investments and we will make the necessary investments to expand our competitive technology leadership.
As we said during our third quarter conference call competitive gaps tend to expand the most and persist the longest based on relative levels of investment through times of crisis.
We currently expect to spend up to $15 million and capital expenditures in 2021, and we will make the necessary investments and working capital as activity levels improve.
We continue to invest and our efforts in the solar and energy storage space.
Energy tool base is rolling out a significant new release of its industry, leading software offering for the economic modeling of solar and energy storage projects, which provides streamlined workflows and additional features for its users.
The sales pipeline for our intelligent energy management system is building as we refine our commercial approach to the market.
We see opportunities for growth both within our core drilling related service business as well as from our investments and the completion space through a minority interest and intelligent wellhead systems, and then the solar and energy storage space through energy tool base.
Equipped with exceptional people uninspiring culture innovative products and an unwavering commitment to our customers peso and will seize on these opportunities and we would now be happy to take any questions.
Okay.
Thank you at this time, we will be conducting a question and answer session in order to ask a question. Please press star and the number one on your telephone keypad. Your first question comes from the line of Michael Robertson with National Bank Financial Michael Your line is open.
Hey, good morning, John Sweeney and thanks for taking my call a threat and making money.
Just a couple of quick ones here I was hoping you could maybe provide some color on the current pricing dynamics and I. Appreciate the activity levels are still very depressed and likely.
<unk> on your side, but also with commodity prices rising was just wondering if you're able to sort of take take part in that.
Yes.
And Mike It's John.
It sounds a bit like a broken record for prior quarters I think.
And sort of talked a little bit about the differences between the Canadian and U S markets.
Canadian market outlook is a bit more challenged when you think about some of the.
You'll challenges that we've seen in terms of interest takeaway capacity and those sorts of things and so I think that continues to be a bit of a headwind on the Canadian side, whereas the U S side, we never really saw at quite the same intensity on the pricing pressure side now.
And I'd say broadly across both markets and things are probably easing a little bit relative to where we would've been up the the worst of the pandemic, but I would expect we would continue to see more pressure on the Canadian side and the U S side and again recall, Mike debt. So we haven't sort of seen quite as much compression on the pricing side or some other service companies and so I don't know.
And I would expect that we'll be able to take a lot back because we didn't necessarily have as much debt. We would have given up on the way down either so we do think there's some opportunities as the focus becomes more on the technology side to go look at some of the ways. We offer the products for both from a pricing and just the commercial construct.
But beyond that I don't know that will be a significant change on the pricing side.
Got it and that's that's that's helpful color. Thanks John.
Last question for me switching gears I just wanted to you touched on the sort of refined and commercialization and you're going through right now for.
E. T V. I was wondering if if there's whether it's like a specific geographies that you're sort of targeting with that or.
How should we be thinking about that.
Not so much geography, and like as much as if you think about the the project and totality as people would look at these installations of solar and putting energy storage with it.
Dave I think bringing together the pieces of the overall project and sometimes differently in terms of the parts day source, either together or separately and so when we look at different commercial approach as we think about how we might best align with different ways that the customer has pulled together and those projects as a total offering.
Got it got it alright, well, thanks, a lot I'll turn it back.
Thanks, Mike.
Your next question comes from the line of Matthew Weekes with IAA capital markets. Matthew Your line is open.
Good morning, Thanks for taking my question and you know I was just wondering looking at sort of the cost structure and a little bit and you say, it's your intention to continue investing in R&D to stay competitive looking.
Looking at sort of the operating expenses going forward as a good way and look at it sort of a Q.
Q4, our annualized sort of continuing to run at that rate and then assuming maybe and in the cost of sales side, you know kind of a similar structure except for without queues.
Well now and I think some movie if reintroduction of course as things come back are somewhat lumpy. So you can't necessarily just kind of have some straight trajectory or plateauing of any of the cost specifically right. So if you look at coming out of the prior downturn, we would've talked about look overall incremental EBITDA margins like.
Somewhere in the 75% range over a range of $50 million to $100 million of revenue and that continues to be the case, so on a quarter to quarter basis. Obviously, we were quite a bit ahead of that this quarter that implies that we'll have some future quarters, where we will go below that number and that really comes around the timing of some of the cost for me back for.
Example, things like repair expenses, where you might increase some repair expenses and anticipation of the next level of activity growth. So.
You can't necessarily just build a straight pattern on the cost side, it's more thought of over a range of 50 to 100 million and revenue, where we should see that north of 75% show up.
Okay. Thanks for that that that helps a lot.
And just another question I think I'll, just ask sort of about the long term.
And the outlook and maybe some things that you might considering doing what sort of balance sheet flexibility given sort of the free cash flow outlook.
Pretty good are there any sort of additional investments youre looking at right now that are sort of related to what youre doing and solar and energy storage are exploring new avenues or is there just sort of any investment.
Ideas that are and it's sort of early stages right now that you might be pursuing going forward.
No specific ideas that we're gonna be able to speak to but what I would say generally when we think about capital allocation longer term, we've talked about sizing the cost structure too and activity level that we expect in the medium term rate that five to 600 U S rig type of environment and in that environment, We expect to have additional free cash flow but.
We'll maintain flexibility around capital allocation to look at the types of opportunities that you'd be talking about here can we either scale capabilities, we have within the drilling related services on the completion side, where we of course have the minority investment with intelligent wellhead systems or are there things, we can bolt on to the initiatives and the energy and solar storage space as it relates to.
Additional product additional capabilities additional markets and those sorts of things.
Okay. Thank you al.
Thanks.
And.
Your next question comes from the line of Cold pressed with Stifel. Your line is open.
Good morning, everyone.
Maybe just any color on the last question.
And <unk>.
Think about free cash flow would it be fair to say that you guys are prioritizing more growth and maybe say M&A over something like share buybacks or dividend increases.
Well I think the question around M&A versus share repurchases and of course share repurchases really is M&A just of your own stock.
But I think the question of that is actually related to what opportunities you see for most to generate the most value right and and that's a little bit impossible to predict but clearly there is a prioritization around either repurchases or additional M&A to bolster our product offering and and opportunities.
Over straight growth of the the regular dividend when we think about having flexibility and capital allocation. Our expectation is and the medium term, we would pay out a lower percentage of free cash flow as dividends to retain some of that flexibility, but what we ultimately do in terms of repurchases versus M&A will depend on the types of opportunities that exist either.
No look you've got our own share price and saying that's attractive to own more of our own company or theres other opportunities and the M&A space.
Okay great.
And in the quarter you had some nice north American market share capture can you talk about your line of sight for near term changes and this metric maybe absent the seasonality and Canada.
Well near term is always a little bit tricky, because it's not just seasonality and Canada. There's also a question of which specific operators and contractors pick up more or less rigs unit quarter. I think as we think slightly longer term, we certainly feel good about the prospects for market share and the U S. As it relates to.
The consolidation results and less companies that care more about technology, and we think that's better for for based on and to your point that typically we've had lower market share and Canada already and now the U S rather than higher and Canada, which means the blend is always higher and Canada's busier. We think we do have opportunities on the U S side.
Okay, Yeah, great. That's very helpful. And then maybe internationally and some strong growth. This quarter do you kind of have line of sight to maintain or increase that Q4 revenue and activity levels and these mark to markets.
And I think there's line of sight for it to increase maybe not quite as quickly right. So much of the international growth is simply a relaxation of some of the restrictions that some jurisdictions still had around COVID-19 and so the relaxation of those gives you a little bit of a hyper normal sort of growth in the quarter, but I do think we.
And I have continued growth opportunities and the international across most of the markets we would be in.
Okay great.
And then there was some commentary earlier on it but as you think about improved ancillary product adoption and how should we be thinking about the drivers of that is it kind of just activity improvement overall are there sort of some other factors for how you think about growing that.
What do we think about that focus on technology that customers have that tends to then drive some additional adoption of some of the ancillary products as they're trying to make data available to more people either onsite or back and you're off the back office right and so that really does a driver of increased adoption of some of those.
Existing products and typically when we come out of downturns, we see.
Some additional adoption because when we go into the downturn, we often try to work with customers too.
And what they are spending with pace on reducing debt by maybe taking a little bit less product morsels and giving it up on the price side, because we've always believed it's a little bit easier to get back adoptions and price and so we usually see a little bit more adoption coming out of the bottom of downturns on that basis as well.
Okay, Great that's super helpful. I'll turn it back thanks.
Thanks, Paul.
As a reminder, if you would like to ask a question. Please pass the star and the number one on your telephone keypad. Your next question comes from the line of Keith Mackey with RBC. Your line is open.
Hi, good morning, guys.
Good morning.
Just a question first on used and what do you what are you thinking about Qs for the first and second quarters of the year.
Yeah. So we have and we plan to continue to participate and the program as it's available to us, but as you know given that the claim amount is largely driven by a formula based on period over period revenue declines and.
We do expect that claim to be lower in the context of improving revenue level and so you can expect to see lots of net $2 2 million that we collected and in Q4.
Got it okay.
And.
Just on on the overall EBITDA number then given where rig counts have gone since Q4.
And.
You talked a little bit about some and some costs returning on a lumpy basis, but.
Looking at those factors and combination should we be thinking about $8 million as a jumping off point or or will there be enough for a possibility that things might step back from there.
On the EBITDA side, it's going to be probably a question of what the relative activity looks like on the Canadian side right. So because obviously, it's always busiest and the first part of the first quarter, but I would say if you think about the overall cost we are gonna be reintroducing some costs in anticipation of either because there's two related issues right. There's the issue around.
And and expectations of future activity, where we will have some cost build in anticipation and then there were opportunities that we see to increase of R&D investments to generate additional benefits for customers that will be able to monetize.
But activity increases are going to overwhelm those cost increases and the short term I would expect and as you know most of our revenue ex those considerations tends to flow through to EBITDA, so that should be positive.
Got it okay. Thank you and one final one you mentioned and I think it was and an earlier question or maybe at the end of your prepared remarks about opportunity to change some of the commercial dynamics of how you offer products I think it was on the drilling side.
Can you, maybe just give a little bit more color into that and like are you are you talking about just changing the revenue model or is it moving to any kind of a performance based contract and can you maybe just give a little more color on the on the considerations of all of that.
It's not necessarily the revenue model or sort of the commercial construct as much as some of the.
Some of the peripheral products or some of the the non peripheral products.
The benefits that customers get for those products are sometimes different for different customers and so sometimes we can adjust for it.
And the value proposition differently for different customers to probably better realize the value of that different customers see.
Got it okay, well Johnson Lee and thanks very much for the color.
Thanks Keith.
Your final question comes from the line of John Gibson with BMO capital markets. John Your line is open.
Good morning, I, just have one and it kind of builds on Cole's question about the ancillary products you had some commentary and the release of what your drilling advisory system. I'm. Just wondering if you could talk about and rose to new customers and particularly on the higher spec rig classes and the U S.
So John with the higher spec rig classes, we've always talked about.
And the drilling intelligence base, particularly with drilling advisory system Theres quite a bit of integration work with the control systems and so as you start to work with additional fleets. There is some more integration work and what I would say is that we're moving forward on a few more integrations with some different types of rig fleets and so that should start to unlock additional.
Opportunities for for growth and the drilling advisory side.
Okay, great. Thanks, I'll turn it back.
Alright, Thanks John.
This concludes our question and answer session I will turn the call back over to John <unk> for closing remarks.
Thank you very much Amy and thank you very much for taking the time to join US. This morning for a call and we appreciate your continued interest and support.
Our hope is that each of you will stay safe and healthy and the days and weeks ahead, and we look forward to speaking again after the release of our first quarter results in the meantime, if you have any further questions Selena and I would welcome your calls and things.
Very much and have a great day.
This concludes the conference call on behalf of paced on systems and you would like to thank everyone for your participation you may now disconnect.
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