Q3 2021 Pason Systems Inc Earnings Call
Good morning, My name is Chris and I'll be your conference operator today at this time I would like to welcome everyone to the peso and systems, Inc. Third quarter 2021 earnings call.
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 advisories located at the end of the press release issued by peso on systems yesterday, which describe forward looking information.
Information about the company that is discussed on today's call may constitute forward looking information.
Additional information about pace on systems, including the risk factors relevant to the company can be found in its annual information form.
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Thank you Chris.
Yeah.
Good morning, and thank you for attending peso in the third quarter of 2021 conference call I'm joined today in Calgary by Selene, Boston pace Ons, Chief Financial Officer, who will start today's call with an overview of our third quarter financial performance and I will then close with a brief perspective on the outlook for the industry and for pace on after which we will take questions.
I'll now turn the call over to Selene.
Thanks, John and thanks to those attending today's call.
I'm pleased to report on pace on third quarter results, which represent a vast improvement from the historical lows experienced by the company during the third quarter of last year.
Since bottoming in August of 2020 U S land drilling activity has consistently improved and we've seen similar trends in all of our major end markets.
Our goal throughout the downturn was to minimize losses, while continuing to make critical investments in technology and service. We also aim to protect our enviable balance sheet, while prudently allocating capital to shareholders and making strategic investments in future growth.
Our third quarter results demonstrate strong execution on these fronts.
Our leading competitive position has resulted in record North American revenue per industry day, and we continue to demonstrate significant operating leverage and free cash flow conversion in the context of improving activity levels.
Hey, so on generated $57 7 million of revenue in Q3, 2021 of 150% improvement over the third quarter of last year, which represents a drilling activity low seen during the pandemic.
North American industry days, although still well below pre pandemic levels increased by 124% during the third quarter of 2020 compared to the third quarter of 2020.
During that time based on continued to grow its competitive position in the United States, while defending its leading position in Canada pricing conditions within each end market also improved accordingly revenue per industry de grew by 15% from $667 in the third quarter of 2020 to $765 in the <unk>.
Current quarter, representing a record level for the company, beating the previous record of $738 in the first quarter of 2020.
We'd like to remind listeners that north American revenue per industry day will fluctuate with seasonal changes in activity levels in North America.
Third quarter revenue per industry day benefited not only from strong market share and improved pricing conditions, but also benefited from an increased proportion of Canadian industry days in comparison to the third quarter of 2020.
Yeah.
Resulting in North American revenue was $46 1 million for the third quarter of 152% improvement from the third quarter of last year, and a result that outpaces the improvements in underlying industry conditions.
Industry conditions in international end markets also improved significantly from the levels experienced in the third quarter of 2020 as a result revenue generated by the international business unit was $10 4 million in the third quarter of 169% improvement from the third quarter of 2020.
Energy tool base, our emerging business in the solar and energy storage market continues to make progress.
Reported revenue in this segment was $1 2 million in the third quarter, the highest level ever achieved for this segment, which continues to be primarily comprised of subscription based software licenses for solar energy planning tools that begins to incorporate revenue generated by control system and related hardware sales.
[noise] caisson generated $22 4 million and consolidated adjusted EBITDA in the third quarter of 2021, a significant improvement from a loss of $1 1 million in the third quarter of last year.
As the industry recovers, we continue to incur 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 remains strong.
Third quarter results reflect 68% incremental adjusted EBITDA margins experienced both year over year and sequentially.
In the quarter Pizza and recognized $2 2 million in government wage assistance, primarily related to the Canada emergency wage subsidy and as a reminder to listeners the benefit of which is excluded from our calculation of adjusted EBITDA.
We have participated in this program until its recent termination in October of 2021.
On a year to date basis based on generated $143 9 million in revenue compared to the $123 9 million of revenue that pace on generated during the first nine months of last year.
Adjusted EBITDA for the nine months period was $48 3 million compared to $31 3 million generated during the first nine months of 2020 for which close to 100% was generated in the first quarter of 2020 prior to the pandemic related impact on industry conditions.
Although activity levels continue to be well below pre pandemic levels, a compare a comparison of year to date results demonstrates the recovering industry conditions coming out of the downturn.
Our balance sheet remains strong and incredibly well positioned with $147 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 third quarter pace on generated $16 3 million and free cash flow, which reflects the investments made in working capital and equipment in the quarter.
Based on returned $7 2 million to shareholders through dividends and share repurchases in the third quarter, we are maintaining our quarterly dividend at <unk> per share and we will continue to balance our commitment to shareholder returns, while exploring opportunities for growth outside of North American land drilling and preserving financial strength to support long term success.
In summary, our third quarter results reflect our leading market presence, our significant operating leverage through improving activity levels and our pristine balance sheet, we continue to be in a position of excellent competitive and financial strength.
I will now turn the call back to John for his comments on our outlook.
Thank you Celine.
We were very pleased with based on third quarter financial results.
The results this quarter reflect both significantly improved industry conditions as compared to a year ago as well as our strengthened competitive position as a result of maintaining investments in our service and technology capabilities through the most challenging quarters of the downturn.
Maintaining those capabilities allowed pays on to achieve the highest revenue per industry day in the Companys history, driven by year over year gains in market share increased product adoption and better price realization.
Going forward, while we expect revenue per industry day to remains strong the pace of increase is likely to moderate.
From that position of strength, we expect to fully participate in the continued growth in industry activity in the coming quarters.
[noise] peso on shifts at 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 caisson is well situated to contribute to those efforts.
Well the increase in North American rig counts, we have witnessed over the past few quarters has not fully tracked higher oil prices, we expect to see industry activity continue to steadily grow.
The industry recovery is unlikely to be sharp as E&P companies continue to exercise discipline in their capital spending and prioritized capital returns to shareholders.
And as the industry continues to grapple with challenges related to the availability of labor and supply chain disruptions.
That said supply and demand fundamentals point to higher oil prices in the short to medium term and commentators are increasingly talking about the potential for a global energy crisis due to oil and gas shortages.
In the United States peso and its largest market oil production remains approximately 10% below pre pandemic levels the inventory of crude oil and petroleum products is the lowest it has been in more than five years and the number of drilled but uncompleted wells has decreased by 40% from its peak.
In June of 2020.
Yeah.
Our international operations posted its highest reported revenue since the first quarter of 2015, and we expect continued strength across our international markets.
In addition to maintaining a strong base of subscribers for its economic modeling a proposal generation tool energy tool base is starting to translate increased bookings from the sale of its control systems into revenue.
Our significant operating leverage will drive high incremental margins as revenue levels continue to improve though we will incur the necessary cost to position ourselves for further growth as industry activity levels increase and to further expand our technology leadership.
We expect to see increases in our operating costs, primarily around personnel and equipment repairs in anticipation of further activity gains and as a result of prevailing inflation rates.
Our research and development efforts are resulting in market share and pricing improvements as we deliver additional value and functionality for customers and we will continue to make meaningful investments in this area.
We expect to spend up to $15 million in capital expenditures in 2021 before returning to a more sustainable level of capital expenditures of approximately $25 million in 2022.
I would note that the timing of capital spending between the remainder of 2021 and 2022 will be heavily influenced by ongoing global supply chain challenges.
Our balance sheet remains strong and our free cash flow generation continues to improve.
We will continue to allocate capital by balancing investments in maintaining our leadership position in our existing drilling related markets positioning.
Ourselves for future growth in new and growing markets and returning capital to shareholders.
We remain focused on ensuring that <unk> is an innovative profitable and responsible company and we would now be happy to take any questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone you will hear a three ton prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by two if.
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Your first question comes from Michael Robertson of National Bank Financial Michael. Please go ahead.
Hey, good morning, gentlemen, saline congrats on a great quarter and thanks for taking my questions.
Thanks, Mike Thanks, Mike.
Different given the tightness in the labor market you are you touched on there and the need to increase head count ahead of anticipated growth in activity levels.
How confident are you in pace ons ability to ultimately pass.
Related cost increases on and what kind of lag do you expect to see there.
Hey, Mike It's John.
I think at the end of the day the labor challenges were more pronounced for some of our customers, but if you think of the ratio of employees per rig site. We would have one employee who looks after a number of rig sites, where customers will have a number of employees on any one rig site. So their challenge is more pronounced so.
I don't know that we feel directly a labor shortage challenge the same way I think we have the ability both through how we're able to scale the organization and how we're able to rotate people through all areas of activity and we will be able to address the demands from customers to service rigs wherever they might be I think the.
Pace of growth for the industry as it relates to the labor challenges are more likely to become from the side of our customers are facing the challenges around labor.
Got it appreciate the clarification there.
My My other question was related to the free cash flow that you guys are generated in the quarter, which was very strong and you know given the increase in activity levels that you've seen to date and our expectations for a supportive environment looking out to next year. How are you thinking about prioritizing.
Of that potential excess free cash flow uses at the moment.
Yeah. So I mean, continuing to reiterate kind of John John said earlier, I mean, continuing to balance investments in our existing business focusing on maintaining our leading <unk> leading market position. There certainly feel that theres lots of opportunities in our core business balancing not with shareholder returns and then the opportunities to invest in.
Future growth I think you know as it relates to cap returning capital to shareholders that youll recall that we sized the dividend last year for our drilling activity level in the five to 600 U S land rigs.
Which really isn't where all that we've just recently entered so I'd say you can expect some modest growth in the dividend as our free cash flow profile improves.
Those continued improvement in industry conditions, but it will still be in favor of a more flexible approach, which utilizes the share repurchase program over that time as well.
Got it got it that's helpful color. Thanks for taking my questions and congrats on a strong quarter I'll turn it back.
Thanks, Mike. Thank you. Your next question comes from coal Pereira Stifel Coal. Please go ahead.
Hey, good morning, everyone and congrats on the strong quarter.
To start.
To start with some of <unk> comments on opportunities outside of North America land drilling I mean, just given where the cash position is I mean do you see much out in the market that you really are.
Find has an interesting opportunity or do you see more value than just continuing to grow some of your existing ancillary businesses.
And so I guess, we don't think of it as an either or question call as much as a bolus and question right now the ability to execute on things that are very directly related to your existing business. You can do that much more quickly right. So I think we have opportunities specifically within our business. When we talk about things we can do on the research.
And development side there'll be some stuff probably on the capital expenditure side as we look over the next couple of years related to things.
Secondly, within the core business or when you look at some of the investments we have in things like energy tool base or a minority investment in intelligent wellhead systems again, our ability to deploy capital in effect programs more quickly in those areas is easier because they are closer to home and we have an involvement already we continue to.
Are there things outside of those where we could participate meaningfully and while we spend time looking at them and thinking what would make logical strategic sensor based on the timing around being able to execute on those is quite different because it involves actually getting exposed to the opportunity before you can start to exploit the opportunity.
Okay perfect. That's helpful. Thanks, and I guess, maybe.
Coming back to <unk> comment on the dividend. So it sounds like maybe as we surpass that 500 to 600 level you might look at bumping the dividend, albeit at a more modest pace. I mean, you know how how are you kind of thinking about what the right Ted.
What the right level for the dividend is maybe in terms of what metrics you would look at.
Yes.
So when we thought about the dividend a couple of years ago, we would've talked about when we resized. It we were looking to end up in a world.
A return to normal whatever that might mean, where the dividend would be a lower percentage of free cash flow than it had historically been to allow ourselves flexibility to look at other growth related types of investments and so that that philosophy hasn't changed at all so the dividend now is a small.
Our percentage of free cash flow and so I still mean would've we've noted as free cash flow grows we think theres the opportunity to grow the dividend as well, while keeping it at a much lower percentage of free cash flow than it historically would have been.
Yeah.
Okay perfect. That's helpful. Thanks, and then.
Just quickly I mean on our supply chains, obviously, it has the potential to impact your pace of R&M and some maintenance capital spending, but I mean fair to say, yeah, obviously, it could be an issue, but you know maybe not to the point, where it might impact peso on to utilization.
Yeah, It's a great point, Paul I think when you think about we talked about the labor availability question was probably more of an impact for some of our customers. The same is probably true on the equipment side as well when you think about supply chain, we're not immune from supply chain challenges, but we don't have the same types of requirements as it relates to traditional materials.
So when we think about supply chain impacts today, it might be related to fleet right, where you may actually have to simply decide you're going to run vehicles longer and incur more repair expense for longer periods of time as opposed to your normal refresh cycle. Just in terms of access to fleet types of things or Theres. Some things on the product side, where we may aspire.
Or to get a new product into the market sooner and we just have to delay some of our hopes and aspirations a little bit based on availability of supply chain more so than actually causing interruptions in our day to day business I think the day to day business interruptions, either people or supply chain or more of an impact for our customers that are more.
Or likely to impact pace of growth rather than our ability to respond to people looking to have us do work for them.
Okay perfect. That's helpful I'll turn it back thanks.
Golf call. Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star one on your Touchtone phone.
Your next question comes from Keith Mackay RBC Keith. Please go ahead.
Hi, Good morning, John Flynn.
Good morning Casey.
Just curious about the margin in Q3, and the incremental margin outlook.
I guess in general how many or how much of the incremental costs that you would have or expect to incur.
We're built into Q3 margins and how should we be thinking about incremental margins.
Over the next over the next say 12 months as the industry continues to add rigs is that you know 70 70, 75% range still a good a good target to be in as the as things ramp up or are there going to be incremental costs that might change things from from that level.
Yeah, Hi, Keith the 17th I think we still feel good about the 70 to 75 now I think I'll reiterate earlier comments and that it won't it measured over time right like it won't necessarily be seen every quarter sequentially or every quarter year over year and most most of our cash opex and G&A continues to be fixed and it's really primarily.
People costs. So a couple of dynamics at play that we've previously alluded to we are as we've done in the last few quarters, we will continue to be making investments in anticipation of a future activity levels. So you'll see that in additional people and feel that additional investments in R&D and some higher repair costs and then John commented on the near term inflationary pressures.
Pressures potentially on on cost of people going up a little bit and we're gonna have to make investments in that here in the near term so.
I think that the margins that you saw on adjusted EBITDA in the third quarter.
We're very strong and I think we feel good about being able to maintain those levels and growing slightly into 2022.
In the context of improving activity levels.
Perfect. Okay. Thanks for that color and just on the energy tool base. So you commented about starting to see some hardware revenue come in from from prior bookings, maybe just give us a little bit of context on how we should expect that to progress over 2022 and <unk>.
Should we then even start to think about that that segment contributing positively on a gross margin basis through 2022, as well or is it still more of a longer term longer term ramp.
Yeah. So you asked two questions or Keith your question around revenue growth as these control system bookings start to translate into revenue you would have just seen the very early stages of that this quarter right. I think we should see some increased momentum on that side here in the next few quarters. When we look at what we have in terms of bookings and what our.
Patients are around delivery dates and commissioning dates and those sorts of things for projects, which drive revenue realization. So I think we should see a little bit of acceleration from that in the in the coming quarters. Now your question around whether it will be a positive contributor to profitability in 2022, I would say, it's a longer term view.
<unk> for that right, we're making real investments on the research and development side product development and we're going to continue to make those investments in 2022 at a level that will very likely be ahead of what we will see from the margin that comes from these these projects on the control system side.
Perfect. Okay. Thanks, very much for the color I'll turn it back.
Thanks, Steve Thanks, Keith.
You there are no further questions at this time. Please proceed.
Thank you very much for taking the time to join US. This morning as always we appreciate your continued interest and support and if you have other questions. You are certainly welcome to reach out to saline or myself at any point, thanks, very much and have a wonderful day.
Thank you. This concludes the conference. Thank you everyone. You may now disconnect.
Yeah.