Q2 2021 Pason Systems Inc Earnings Call
Good morning, Ladies and gentlemen, my name is Michelle and I will be your conference operator today.
At this time I would like to welcome everyone to the pace on systems, Inc. Second quarter 2021 earnings call.
The contents of today's call are protected by copyright and may not be reproduced without the prior written consent of pace on systems, Inc.
Please note. The advisory is located at the end of the press release issued by pays on systems yesterday, which describe forward looking information.
Certain information about the company that is discussed on today's call may constitute forward looking information additional.
The information about peso and systems, including the risk factors relevant to the company can be found in its annual information form.
At this time all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the star followed by the number too.
I would now like to turn the conference over to Mr. Jon Faber. Please go ahead.
Thank you Michelle.
Good morning, and thank you for attending peso on second quarter 2021 conference call.
I'm joined today in Calgary by Selene, Boston pesos, Chief Financial Officer, who will start today's call with an overview of our second quarter financial performance.
I will then close of the brief performance on the outlook for the industry and for peso line and we will take any questions you might have.
And I'll now turn the call over to Selene.
Thanks, John and thanks to those attending today's call.
I am pleased to report on peso on second quarter results, which represents the first quarter since the pandemic started where the prior year comparative quarter also represents the headwinds our industry has faced throughout the last 18 months.
Within this context, our second quarter results reflect the significant improvements in industry conditions from the lows experienced in 2020.
We took the difficult but necessary steps to adjust adjust our cost structure in the second quarter of last year, while continuing to make critical investments in technology and service to meet the demands of our customers.
The measures of proven effective as we've grown our competitive position to record levels and as a result of grown revenue at a faster pace than the improvement seen in industry activity all of that.
While continuing to demonstrate capital discipline and strong operating leverage.
PE fund generated $43.6 million of revenue in Q2 of 2021 of 62% improvement over the second quarter of last year, which represented the steep drop off in drilling activity seen at the start of the pandemic.
North American industry days, although still well below pre pandemic levels increased by 37% during the second quarter of 2021 compared to the second quarter of 2020 during that time peso and continued to grow its competitive position in the United States, while defending its leading position in Canada, resulting in record North American market.
Share for the company in the second quarter.
Accordingly revenue per industry day grew by 13% from $643 from the second quarter of 2020 to $728 in the current quarter.
Given this improvement Asos, North American business unit generated $34.9 million in revenue in the second quarter of 52% improvement from the second quarter of last year and the result of outpaces the improvement in industry conditions.
International revenue of $7.8 million represents an increase of 157% from the $3 million generated in the same quarter of 2020, Inc.
The industry conditions and international end markets have improved greatly from the almost complete stop in drilling activity that was witnessed in the second quarter of last year in certain operating regions for pay for them.
NRG tool base, our emerging business in the solar and energy storage market continues to leverage its leading economic modeling and proposal generation software package to generate additional sales opportunities of intelligent energy management control systems.
Reported revenue in this segment was <unk> 9 million in the second quarter consistent with the prior year period and continues to be primarily comprised of subscription based software licenses for solar energy planning tool.
Also of note despite expected seasonality in Canada, causing the second quarter to generally be of softer result pesos overall revenue increased sequentially from $42.6 million in the first quarter to $43.6 million in the second quarter driven by the sequential growth seen in the international and U S end markets, coupled with the Kantar.
<unk> improvement in revenue per industry day.
PE fund generated $12.8 million and consolidated adjusted EBITDA in the second quarter of vast improvement from a loss of 800000 in the second quarter of last year.
As the industry recovers, we are incurring certain costs in anticipation of future revenue increases primarily as it relates to equipment repairs and people. However, many of our operating costs remain fixed in nature and our operating leverage remained strong.
Quarter results reflect 81% incremental adjusted EBITDA margins experienced year over year.
In the quarter peso and recognized $3 million in government wage assistance, primarily related to the Canada emergency wage subsidy and as a reminder, the listeners of the benefit of which is excluded from our calculation of adjusted EBITDA.
We plan to participate in the government's recent announcement of the extension of this program through to October 2021.
On a year to date basis caisson generated $86.1 million in revenue compared to the 100 and $100.8 million of revenue that pace on generated during the first half of last year.
Adjusted EBITDA for the six months period was $26 million compared to $32.5 million generated during the first half of 2020.
Although results have improved significantly from the lows experienced in 2020, a comparison of year to date results continues to reflect the significant change in industry conditions since the first quarter of last year.
Our balance sheet remains strong and incredibly well positioned with $135 million in cash and cash equivalents at the end of the quarter and no interest bearing debt.
We continue to make investments in our core business to support increased levels of activity in the second quarter based on generated $5.7 billion in free cash flow, which reflects the investments made in working capital and equipment in the quarter.
We also continue to evaluate opportunities outside of North American land drilling and in the quarter, we used $7.1 million to grow our minority interest in intelligent wellhead systems of <unk>.
Pivot North American completions technology and service company for which we made our initial minority investments in 2019.
Also in the second quarter of Pacer unfunded one of the two remaining $5 million put option associated with our minority investment in that business.
Caisson returned $7.2 million to shareholders through dividends and share repurchases in the second quarter, we are maintaining our quarterly dividend of <unk> per share and we will continue to balance our commitment to shareholder returns, while preserving financial strength to support long term success.
In summary, our second quarter results reflect our leading market presence, our significant operating leverage through improving activity levels in our pristine balance sheet. We are emerging from the depths of the downturn from a position of excellent competitive and financial strength.
I'll now turn the call back to John for his comments on our outlook.
Thank you Celine.
The peso and posted excellent second quarter financial results and we look forward to carrying that momentum into the coming quarters.
Our outlook for growth continues to improve as we feel confident in both of our strategic position and our competitive position.
Please go on shifts of the center of the flow of much of the drilling data in the oil and gas industry.
As customers look to leverage data through the use of automation and analytics technologies peso is well situated to contribute to those efforts.
The investments we made through the deepest parts of the downturn to retain our service and technology capabilities have allowed us to grow our north American market share to the highest level of the company's history as U S market share continues to increase while the Canadian market share holds its leading position.
Revenue per Edr day remains below pre pandemic levels in each of our operating regions, but continues to improve from the low points of mid 2020.
As industry activity levels continued to grow through the remainder of 2021 and through 2022, our stronger competitive position, increasing price adoption and improving price environment will continue to drive revenue growth.
The ongoing COVID-19 pandemic continues to create uncertainty around the near term picture for oil demand and uncertainty around the supply levels from OPEC plus countries will also serve to temper growth in industry activity.
That said forecast point to global oil demand exceeding pre pandemic levels in 2022.
Sustained lower levels of U S production decreasing storage inventories in a consistent decline of the inventory of drilled but uncompleted wells all point to the need for increased levels of North American land drilling in the future.
Industry analysts continue to call for U S rig counts to reach 500 by the end of the year and to grow through the 600 rig count level in 2022.
The Canadian rig count currently sits above 150 rigs ahead of its August 2019 level two years ago and is also expected to grow further through 2022.
We are seeing significant growth in industry activity in our international markets since the lowest points of the COVID-19 pandemic.
At this point, we expect further growth to be much lower in the near term as various jurisdictions contend with additional volume variance and increasing case counts from the virus.
So lean made reference to our robust incremental adjusted EBITDA margins. We continue to expect these incremental margins to be strong as we see revenue levels improve though we will incur the necessary cost to position ourselves to both participate in increasing industry activity levels as well as to further expand our.
Technology leadership.
We expect to see increases in our operating costs, primarily around personnel and equipment repairs and the anticipation of further activity gains.
Our research and development investments will also see increases in the coming quarters as we see evidence of these investments, resulting in market share and pricing improvements, while we continue to deliver additional value and functionality for customers.
Consistent with our experienced the emerging from the downturn a few years ago, we expect to generate incremental adjusted EBITDA margins in the order of 75% on an additional $50 million to $100 million in revenue from the lows experienced in 2020.
Given our need to spend in anticipation of future activity incremental margins on a quarterly basis will fluctuate significantly with margins being more compressed than earlier quarters before expanding again as industry levels and the activity levels deliver.
We expect to spend up to $15 million in capital expenditures in 2021, and we'll continue to make the necessary investments in working capital as activity levels improve.
Peso on strategy continues to include making investments for future growth outside of oil and gas drilling and we made further progress in this area during the second quarter.
During the quarter. In addition to providing a further $5 million for growth capital as part of our original investment into intelligent wellhead systems, we have the opportunity to deploy an additional $7.1 million to purchase existing outstanding shares an increased pace of ons minority ownership stake.
We continue to be impressed with the <unk> technology offering and are encouraged by the increasing pace of adoption. It is experiencing in the field.
We also continued our development efforts within energy tool base, where we are building out an integrated platform of tools to model control and monitor energy storage assets.
During the quarter. The team released a significant next generation of its industry, leading economic modeling and proposal generation tool.
The sales pipeline and bookings for our control systems also grew further in the quarter.
We will continue to allocate capital by balancing investments and maintaining our leadership position in our existing drilling related markets.
<unk> ourselves for future growth, and new and growing markets and returning capital to shareholders.
We remain focused on ensuring that pace of line as an innovative profitable and responsible company and.
And we would now be happy to take any questions you might have.
Thank you Les.
Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question. Please press the star followed by the one on your Touchtone phone.
If you would like to withdraw your question. Please press the star followed by the two if you are using a speaker phone. Please lift the handset before pressing any keys.
One moment. Please for your first question.
Yeah.
Your first question comes from Michael Robertson National Bank. Please go ahead.
Hey, good morning, all congrats on a strong quarter and thanks for taking my questions.
Thanks, Mike.
In your prepared comments you touched on product adoption being one of the drivers of the.
The increase in day rates I was wondering if that is a function of.
The potential change in client mix or is it something that you're seeing.
The more broad based across your entire customer base.
Okay.
So it's more broadly across the customer base now clearly we've talked in the last few quarters about clients increasingly looking to use of the.
The data that's provided in different ways in their office operations in some of their field based automation efforts and I would say that as we're seeing that increased use of technology of relying on data that debt increases the adoption of <unk>.
Products, both debt capture aggregate and transmit the data as well as the delivery of that data to the systems and technologies they are using.
Got it got it that's helpful.
The the.
The release also noted some near term pressure on margins related to.
Inflationary pressures is the bulk of that coming through on the labor side as the activity levels to continue gradually increase.
Yes, Thanks, Mike that's correct. So raw materials is not so much of a problem for our business, but we're likely to see the impact on cost of the people side of things in our in our business, specifically, particularly software engineering skill set too as you know are.
A crucial part of our Labor force and highly sought after in this market.
Got it and I guess, assuming the the continuance of of a gradual recovery or do you foresee those inflationary pressures keeping EBITDA margins sort of relatively flat to what we've seen in recent quarter quarters or do you think youre inherent operating leverage will be enough to overcome those headwinds.
That's probably a question of just how much of the revenue increase is right I think it is certainly a case, where some of those pressures are from the fact that we are investing for future activity and so those types of costs coming ahead of activity compress margins.
It's not a significant amount of costs that we're incurring for increased activity. So I think with <unk>.
Reasonable increases in revenue it should be sort of offset debt that.
Debt pressure of had the operating margins.
Yes, if I'm understanding correctly, I guess, it would be sort of transient in nature of wants that.
Increase in activity level was realized.
The cost of our probably quite as transient maybe some of the repair costs are a bit more one time, you get the equivalent of kind of ready to your interest up it wasn't.
It may be ready to go but some of those other costs the costs won't be transient, but the margin compression will be because they won't further kind of increase as the revenue increases, yes, sorry, I should clarify that men's line.
On the margin side not on the cost side alright.
All right that's really helpful. Jim I will turn it back thanks for taking my questions. Thanks.
Thanks, Mike.
Your next question comes from John Gibson BMO capital markets. Please go ahead.
Good morning, and congrats on the strong quarter.
Start with.
Pricing across North America, I realize that Youre still seeing some pressure from the downturn, but I'm just wondering if you've seen any signs of life on the pricing side of late.
So when we think about North America, all sort of bifurcate, Canada, and the U S. A little bit because I think of previous quarters, we would've talked to go very different dynamics on the pricing pressure in those two two regions that we operate.
I think the of Canadian market saw more pressure through the worst parts of the downturn and that is is loosening or lightning of debt. So the Canadian market is probably becoming a little bit more constructive in terms of pricing.
I think the the other opportunity that's more meaningful for pricing. If you think going forward is the ability to realize price for some of the new features of our products that we are able to deliver for customers. So the addition, the.
The opportunity to to realize value from the product side is probably more instructive for future pricing, but there is probably a little bit less pricing pressure of the Canadian side in particular.
Got it thanks.
Just regarding your comments about increased use of market share did you gain some new contractor customers or producers or was it more of a factor of your current contract with your customers, putting more rigs back to work.
Well, there's really three things that drive market share right. One is the fact that people who we've long had a good presence with represent more of the market today.
We've been growing our share of those customers as the second function. So there's sort of a double effect, there where you get more share with somebody who is getting more share of themselves and then we have picked up some new customers as well.
Okay great.
As we look to approach 500 rigs in the U S.
Wondering if there is an inflection point, where you would need to add.
Fairly significant cost back to the business or will be more of a gradual build.
It's really not an inflection point and John I think there is certainly a question around how regional the activity levels are and to the extent that they tend to be very focused in an area like the Permian probably means you're staffing up a little bit more on a regional basis, but because we tend to add a technician for.
Number of rigs not on the one to one relationship.
It's not really an inflection point on the cost side and that's why we say, we're pretty comfortable that measured over a good chunk of revenue those incremental margins are in the neighborhood of 75%.
Honestly hard to see how they come much off of that even as you push pass those levels.
Okay last one for me of how fast and so when you look at free.
Free cash flow allocation, particularly in light of the the modest rise in activity levels in your stronger performance financially I'm, just wondering how youre thinking about share buybacks dividends and.
Compared to may be pursuing for the growth strategies.
Well I think the of two priorities from a capital allocation side are to continue to ensure the current and long term growth prospects for pace on and to continue to protect our shareholders' interest in exposure to that growth I E reduce dilution right. So from a buyback perspective, we tend to think.
About reducing the dilution from options and from a dividend perspective, we think about kind of maintaining that regular return of capital to shareholders and we're very focused on the current and long term growth for pace on.
Okay, Great I'll turn it back the congrats again.
Okay. Thanks, John.
Okay.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one.
Your next question comes from core Pereira.
Please go ahead.
Good morning, everyone. Good.
The morning Golf just.
Wanted to start on the margin side.
It sounds like there is some potential from maybe some modest contraction, but can you just indicate whether thats more of a north American situation or maybe some international as well.
It's probably more on the North American side now the international markets. We do think while growth is probably going to be slower for the near term here based on continued challenges around the COVID-19 and some of the international markets.
We're much bigger challenges than we maybe feel in some of the North American markets.
On that side, so there will be some growth to come in the international and the future of at which point, we will have to address what costs. When you do incur but the comment around.
Some of the pressures on margin for future activity and participation in that is really around repair cost maybe some field personnel of the north American side as industry activity increases and we're really seeing results from the R&D investments that we've made in the last number of years over the last number of months and so we are we're looking to continue to <unk>.
On the R&D side, because we've seen that deliver value and that will create some additional costs of the R&D side ahead of the delivery of the products.
Okay, Great. That's helpful. Thanks, maybe thinking about Q2, specifically North American margins were very strong was this just kind of an operating leverage outcome or are there. Some other factors, we should be thinking about.
No that's absolutely the right way to think about the call.
Okay perfect. Thanks.
And maybe turning to the IW asset investment.
Could you add some color around what you may be you might need to see to increase your interest to be a majority owner and how you maybe think about growing this part of the business alongside the existing peso on sweet.
I guess, what I would say is that we have been very intentional about scaling our additional investments in that business.
Round seeing sort of milestones in the progress of the business right. So the fact that we were able to well first of all of the opportunity to purchase more shares that needs to present itself that combined with some milestones we have seen in the development of the company would have encouraged us to make the investment in this quarter. The fact.
That we're putting more growth capital into that business through the put options suggest the sorts of traction of that business is having and so we feel there will probably be milestones coming where we might want to further increase our position, but given it's a private company I am going to retain the ability to not say much more than that call, but clearly we're excited about the traction that they are.
<unk> had and we are encouraged to own more of it as it continues to be successful.
Okay, Great. That's helpful. Thanks, That's all from me I'll turn it back.
Thanks, Paul.
Your next question comes from David Anderson of Barclays. Please go ahead.
Hey, Good morning, John I wanted to go back to the.
Comment you were given about market share before.
And if we think about next year in 'twenty two.
You kind of put out the maybe 600 rigs per year of next year, which I would agree with so let's say, we have 100 rigs or so adding next year I'm just curious how youre thinking about those hundred rigs I mean, obviously a portion of them you already have equipment on so there you are.
Existing customers coming back to work, but I'm just thinking about the rest of the how much of that as an opportunity to gain share is is it more of that there is an incumbent who has the kind of a similar.
Sort of I guess of competitor.
Our competitive offering on the rig or are these rigs that don't have anything like that all of them that theyre almost kind of Virgin rigs to I guess sort of certain extent in terms of.
In terms of in terms of in terms of.
The other generating data in terms of how they accumulate data.
No there will be competitive offerings on those rigs as they come back I think the opportunity for us to participate just proportionately to our current market share in that growth would come from the desire of customers, who are active to increasingly use technologies around automation and analytics, which rely on high.
Quality data to feed the <unk>.
So the fact that we've grown market share in the U S. That's been really important we're seeing that the active.
Operators and contractors are people, who are really looking to deploy technology and we can really facilitate what theyre doing either with our technologies or cases, they are using our data to feed other technologies. They are using and there is real opportunities there for us.
But I guess Im just kind of curious is it more of the opportunity to kind of knock off of a competitor or are these basically kind of kind of opportunity of kind of new opportunities altogether.
In terms of kind of that business that you're going after.
Well I think it's both at the end of the day rate.
Rigs that are running today I think we can continue to chip away of market share further and I think we have an opportunity to disproportionately participate as rigs come back provided its people focus on technology.
And then okay.
Back to the Ws.
The investment you have in there I'm just curious what all of the other parts of this.
In terms of other opportunities you see around kind of out there in terms of maybe on the software side of the hardware side as you get more further in the digital seems to me there's a lot of smaller companies out there sort of do on.
The other types of work like AWS are you looking for other opportunities around that said do you see yourself kind of participating in there and kind of building that kind of opportunity set or on the software side more is that an opportunity you see out there maybe just a little bit kind of your vision. The next couple of years of kind of how the fall shakes out because there's so many companies are offering so many different.
Different things of these days I'm, just wondering how youre of sorting sorting through this.
Well I heard your comments about there's so many companies said something about the barriers to entry in that part of the business. We gave right. So I think the real opportunity for peso. It has been for a long time and will continue to be to be that real infrastructure of the high quality data to feed a variety of different things that people.
We are doing with software as you get closer to the software side and more into the the back office of the operators and contractors that becomes much more fragmented I think the opportunity is for us to deliver and serve data to those parts of the market and we have some offerings in there, but I think the real opportunity is to participate and help.
Enable a lot of those technologies as opposed to directly competing against the lot of those technologies.
Thanks, John I appreciate it.
Thanks, Dave.
Once again, ladies and gentlemen, if you would like to ask a question. Please press star one.
There are no further questions. So I'll turn the conference over to Jon Faber for closing remarks.
Thank you very much for taking the time to join US This morning.
I appreciate your continued interest and if you do have other questions that you weren't able to ask on the call certainly feel free to reach out to the saline or myself and we would welcome. Your calls thanks very much have a great day, and we'll look forward to touching base again after the third quarter.
Ladies and gentlemen, this concludes the conference for today. Thank you everyone. You may now disconnect.
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