Q3 2021 Expro Group Holdings NV Earnings Call

Yeah.

Uh huh.

[music].

Hello, and welcome to the extra week third quarterly earnings Conference call. My name is John and that'll be coordinating your call today.

I would like to register your questions. During the presentation you might do side by pressing star followed by one on your telephone keypad.

I'll hand over to our host Karen David Green Karen. Please go ahead, when you're ready.

Welcome everyone to the expert group third quarter 2021 conference call I'm joined today by Mike Jordan, CEO and Quinn Fanning CFS.

First Mike and Quinn will share their prepared remarks, and then we will open it up for questions.

I'd like to remind everyone that some of today's comments may refer to or contain forward looking statements.

Such remarks are subject to risks and uncertainties.

Cause actual results to differ materially from those expressed or implied by such statements.

Such statements speak only as of today's date and the company assumes no responsibility to update any forward looking statements.

Any future day.

The company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward looking statements.

A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC website or on our website ex stock comp.

Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in our third quarter 2021 earnings release, which can be found on our website.

We have an accompanying presentation to our third quarter results. It is also posted on the extra website under the investors section.

In addition, the pro forma combined company third quarter financials are downloadable on the extra website under the investors section. The downloadable financials include historical Franks and legacy Expro financials, along with the combined company pro forma historical financials.

With that I'd like to turn the call over to Mike.

Thank you Karen good morning, and good afternoon, everyone I want to cover three things with you today first I'll start by discussing our combined portfolio and how we continue to strengthen it next I'll turn to the market and our outlook for the remainder of the year and into 2022, finally, I'll close with the steps, we're taking to enhance margins and maximize.

Cash flow to drive sustainable growth and value creation.

I'm pleased that on October one we completed the strategic combination with Frank's international to create a leading full cycle energy services company extra began trading on the New York Stock Exchange on October 4th under the ticker symbol X P. R. I would like to thanks, everyone at extra in Frank's for their great work in completing the transaction.

We've hit the ground running and are positioning the combined company for long term success.

We believe that we have created a truly exciting platform and a strong starting platform and a strong financial profile that will allow the combined company to accelerate growth improve profitability and enhance value for shareholders employees customers and partners. We have a resilient business model with greater scale and a <unk>.

Broader set of product offerings across the well lifecycle that position us well to perform through market cycles, we have an expansive geographic footprint. The diversifies our exposure in cash flows and improves asquith platforms for continued growth in key markets.

Notably for example on a pro forma basis in 2020, 35% of our revenue is generated in North and Latin America, 28% came from Europe, and sub Saharan Africa, 21% for Middle East North Africa, and 16% from Asia Pacific, Our diversified customer base of international and National oil.

<unk> gives us opportunities to expand our relationships as we introduce new solutions.

With our combined portfolio of services and products, we now offer our clients a broader range of early well lifecycle solutions together, we have enhanced early visibility into customer projects, which enables us to better anticipate their future needs and expand our market penetration.

We have a balanced business with leading capabilities across four product lines, well construction, well flow management, subsea well access and well intervention and integrity are top priority across each business is ensuring safety and integrity and efficiency.

Like to spend a few minutes introducing you to each of our product lines and talk to you about the drivers of our business first well construction.

This product line accounted for 37% of our 2020 pro forma revenue Frank's has been a leader in well construction for over 80 years, we have a comprehensive well construction portfolio, including being a trusted provider of casing and tubular running services completions, cementing and drilling technologies downhole service tool and large die.

Amateur tubular products.

Today in the areas in which we participate we have one of the most expansive well construction portfolio within the industry, we specialize in complex and technically demanding wells with solutions that transform how these wells are constructed to enhance efficiency and productive and production.

All construction represents a great growth area for us with a rebound in global rig counts, a leading market share position and over 4000 wells constructed each year.

And this business is significant with incremental margins above 50% in the offshore demand.

<unk> been exceptionally impressed with the level of technology and the level of engineering that <unk> brings to the table differentiating and proprietary technologies, such as ICANN I tongue Centrify focus on automation Digitization and artificial intelligence to help reduce risk and increase the safety and efficiency of operations.

Just on wealth management.

This product line accounted for 38% of our 2020 pro forma revenue, we have an experienced team and the largest fleet of wealth management equipment, our broad range of capabilities span well cleanup exploration and appraisal services to support the full life of field for our customers. Our portfolio includes real time day.

Acquisition, and metering fluid sampling and analysis efficient solid efficient sand solids, and water management capabilities extended well test in early production facilities and modular production enhancement solutions.

Well flow management represents another area of strength for us with more than 200, global well test packages and more than 10000 successful well test operations to date, we gather valuable well and reservoir data we are specialists in high rate gas developments and we help customers accelerate their cash flow by both expediting production from new discoveries.

And by maximizing recoveries from existing well stock, we are well positioned to benefit from a recovery in the business has tremendous leverage to more complex wells looking forward well flow management has a critical role to play in the energy transition in terms of measuring analyzing and optimizing emissions, we're focused on helping our customers reduce.

<unk> operational emissions through introduction of innovative data engineered solutions and applied technologies.

Now, let's move onto subsea well access.

This product line accounted for 12% of our 2020 pro forma revenue, we're a market leader in subsea well access and provide the most reliable efficient and cost effective well access systems in the industry with capabilities across the complete well lifecycle for DNA through to well abandonment with an <unk> with a new increased focus.

On optimizing production.

We are the global leader in the supply of industry, leading subsea test or assembly with a fleet of over 75 strings and more than 3000 operations performed to date.

Subsea well access is a strong stable business for us with the latest introduction of our <unk> product, allowing us to now offer our customer base. The complete subsea toolbox offering the correct interventional solutions <unk> open water riser systems, and now open water wire through water type systems. This.

Of course is dependent upon the type of operation being carried out by the operator.

And now that brings us to well intervention integrity. This product line accounted for 13% of our 2020 pro forma revenue, our well intervention integrity business provides deployment insight and enhancement solutions to advance production optimization, well surveillance and asset integrity assurance, our well intervention solutions span across.

Well integrity EUR production monitoring perforation in unconventional type recovery and slick line mechanical services. We are confident there is a significant opportunity for us to continue to expand our well intervention integrity business through our existing relationships with our customer base and also to expand with new customers and new geographies.

Well integrity reduction of greenhouse gas emissions by old wells and cost effective decommissioning is a priority for many of our customers. We recently launched an integrated workflow using existing technologies within our portfolio to help customers cost effect efficiently diagnose solve and assure integrity of their well stock.

Guarantee safe and flawless production or detailed preparation for rapid and low cost decommissioning combined.

Combining with Frank's gives us an extended footprint, allowing us to expand our existing portfolio of well intervention technologies to previously inaccessible geographies, such as Guiana, Ecuador and others.

One of our key strategic priorities is capitalizing on our technology platform to provide customers with more precise efficient solutions. Our portfolio is built on innovation and technology that we believe will define the next chapter of our industry with leading solutions across the well life cycles, we now support customers from exploration and well planning through.

Two abandonment, let me give you a few examples of our innovation at work during the third quarter. Our Octopodes annulus intervention system successfully reached a depth of 300 meters in Colombia, and Colombia dwell, while restoring annual pressure integrity and returned the well to production. This desk was a world record for annual intervention.

Other examples of our innovation network was during hurricane Ida, which rapidly intensified in the Gulf of Mexico, We were able to deploy Frank's recently launched 22 inch fruit high pressure high tensile service Packer. This was a finalist in the World Oil awards in the category of well integrity, but this was used to quickly and safely isolate the customers well.

Moving forward, we remain committed to continuing to invest in our innovation platform with a focus on solutions that support our customers carbon reduction goals as part of the energy transition ESG is integral to our DNA at extra this includes our commitment to achieve net zero cotr missions by 2050, and our focus on continued.

Innovation to create a future facing technology platform that helps extra on our customers participate in the energy transition, 40% of our research and development spending in 2021 was targeted to help our customers achieve these carbon reduction objectives, our customers are being driven by lower cost lower carbon as well as fab.

After a more concise decisions through technology and innovation, we offer production optimization focused on gas reduced physical and carbon footprint of operations Flair Atlas and flair reduction analytics and energy market evolution. For example, extra delivered a gas compression solution in North Africa, enabling our customer to reduce <unk>.

House gas gases and minimize player footprint the customer reduce greenhouse gas emissions across 10 sites by roughly 10000 tons of carbon dioxide per day.

Now, let me turn to the market and our outlook.

As oil prices reached multiyear highs on tight supply and global demand recovery the activity and investment environment are continuing to look positive, especially in the production and development phases of the oilfield lifecycle, while many of our customers' near term focus will likely remain on maximizing their investments in existing well stock we believe the <unk>.

<unk> Underinvestment in new oil supply in recent years will result in new final investment decisions or <unk> and that we will see sustained growth in all of our businesses and across all Geo markets continue.

Continuing recovery in 2022, and as oil and gas demand returns to pre COVID-19 levels. We believe operators will shift their focus to reserves replacement.

Internationally. The Supermajors are increasingly focused on lower cost lower risk phase development. In addition efforts to reduce emissions and more broadly to position themselves for the energy transition continues to gather pace as a priority for our IOC customers in parallel to this national oil companies are poised to accelerate their field development efforts.

To maximize their economic recovery.

International drilling activity is forecasted to improve from its low point in Q4 of 2020 with largest increases in central and South America, followed by the Middle East and Asia Pacific.

The company's current outlook for the fourth quarter of 2021 is for flat to mid single digit revenue growth and an adjusted EBITDA margin consistent with the definition used by legacy Expro that 15% to 17% of consolidated revenue driven by an improved business mix and continued cost management discipline.

Our forecast assumes a continuing recovery in E&P expenditures, albeit at different rates in individual countries near.

Near term operators are expected to maximize the investments that they've made previously consistent with past recoveries incremental opex spending and brownfield enhancement programs are expected to be at initial area of customer focus and in select markets. We are seeing some signs of recovering and intervention and well integrity projects execution of which.

<unk> is a traditional strength of extra.

We expect the favorable indicators of recovery that we are currently experiencing will gain momentum as 2021 closes and as we progress into 2022 for.

For 2022 and beyond our pipeline of projects continues to build that will support multiyear growth with a particular focus on a number of the geo markets within the Middle East North Africa, Latin America Africa and Asia.

More broadly, we believe offshore exploration and development and tighter oil projects will attract a disproportionate share of incremental investment dollars.

Given the relative size of the prize in terms of resource potential.

Should support sustained growth for the combined expro, given our capabilities in subsea well access services and complex well flow management and well construction services.

We expect to provide additional color on our 2022 expectations in connection with our fourth quarter financial results early next year.

As outlined previously in prior to the closing of the transaction, we are targeting cost and revenue synergies between $80 million to $100 million within 24 to 36 months, we've undertaken significant work planning for the integration and are confident in our ability to achieve the targeted synergies and we have begun to execute on our plans immediately.

Upon closing the transaction throughout the third quarter, our integration planning has confirmed our expectations that we will strengthen our operating model lower our cost structure and significantly expand margins.

We are confident in our ability to deliver $55 million in annual run rate cost synergies within the first 12 months following close with the opportunity to deliver $70 million of total cost savings and 24 months to 36 months we.

We expect to achieve these synergies largely through indirect cost consolidation and optimization of business processes.

Also expect to realize revenue synergies of $10 million to $30 million in EBITDA through our expanded customer relationships and operating footprint increased time on rig and greater exposure to the full life of field.

In addition to realize in the near term synergies drive the transaction, a multi year industry and global economic recovery of which we are seeing signs together with improving market fundamentals uniquely positions expro to capture the full synergies plus deliver on incremental revenue and margin expansion opportunities and longer term there is.

Significant potential upside relative to prior periods of the cycle, especially given the years of underinvestment in the sector that I discussed a bit earlier.

Before I pass over to Colin I would like to reiterate how excited I am about the about what the future holds for our new company and look forward to working to deliver on our tremendous opportunities. We are well positioned to capture incremental revenue and margin expansion opportunities that come with a market upturn we have a strong financial profile that provides flexibility to drive growth.

With that I'll hand, the call over to Glenn to discuss the financial results.

Thanks, Mike.

As noted in our press release, the merger of Expro in Franks closed on October one.

Just after the quarter cent.

As a result, we have separately reported results for legacy Expro and Frank's consistent with respect to past practices of legacy Expro in Franks.

The Frank's 10-Q will be filed this afternoon.

Legacy extra results are of course available in the press release and will also file an 8-K, including legacy extra results.

The combined companies' results will first be reported in the fiscal fourth quarter of 2021.

As previously disclosed Expro is determined to be the accounting acquirer and go forward financial reporting will include Frank's net assets at fair value as of the database the acquisition and Frank financial results from the date of the acquisition.

Consistent with legacy X pros accounting policies.

Extra manages this business and we will continue to report results based on for geography based segments, which are northern Latin America, or Europe, and sub Saharan Africa or SSA.

Middle East and North Africa, or Mena, and Asia Pacific or APAC.

In addition to consolidated results. We will also report segment revenue.

Segment, adjusted EBITDA and segment segment, adjusted EBITDA margin, which is segment adjusted EBITDA expressed as a percentage of revenue.

Segment EBITDA in segment EBITDA margin are burdened by geography, based indirect costs, but exclude corporate and other central costs not related to core operating activities.

Going forward. We also expect to provide supplemental disclosures to include revenue by four product line groups, which are well construction.

Wealth management, subsea, well access and well intervention and integrity.

Recognizing that at least relative to legacy extra business.

<unk> business is more driven by working rigs and customers capital expenditures through the investors section of our website X Pro Dot Com. We've made available to you pro forma historical data related to contribution and contribution margin for our well construction business, which is essentially the legacy Franks business.

And for our wealth management, subsea, well access and well intervention integrity businesses, which collectively represent the more production optimization centric legacy extra business, which tend to be driven by overall activity levels and customers operating expenses.

For reference extra defined contribution as revenue less cost of revenue, excluding depreciation and amortization and indirect costs that are included in cost of revenue.

Contribution margin is contribution expressed as a percentage of revenue.

Also included in the press release and available through our website as pro forma historical data related to support costs.

Finally, as Karen noted reconciliations of non-GAAP measures to the nearest GAAP measure are included in the press release and in the Q3 conference call slides, both of which are available through our website.

Turning to Q3 2021 results the combined company generated pro forma revenue of approximately $313 million in the quarter, which is up $29 million or approximately 10% quarter over quarter.

Driven by increased activity across most regions and most product lines.

Approximately 37% of Q3 pro forma combined revenue was generated by Franks and approximately 63% was generated by legacy Expro.

As defined by Franks.

Adjusted EBITDA for the third quarter of 2021 was $13 8 million, a sequential improvement of 11% with improving revenue and the Trs and tubular product lines.

As a percentage of revenue Frank's adjusted EBITDA was approximately 12% a sequential improvement of approximately 50 basis points.

Relative to Q3 2020.

<unk> revenue was up 36%.

Adjusted EBITDA in Q3, 2020 was negative so fall through on higher revenue and continued cost discipline has resulted in materially better financial performance year over year.

As defined by legacy Expro legacy <unk> legacy <unk> adjusted EBITDA for the third quarter of 2021 was $30 9 million a sequential increase of 18% driven by higher revenue.

More favorable activity mix and lower corporate costs.

As a percentage of revenue legacy <unk> adjusted EBITDA was approximately 16% a sequential improvement of approximately 150 basis points.

Relative to Q3, 2020 legacy <unk> revenue and adjusted EBITDA were up 33% and 36% respectively.

On a pro forma combined company basis revenue and Isa was up approximately 29% quarter over quarter in part, reflecting the recognition of a sale of an early production system during the just completed quarter.

APAC revenue was up approximately 8% quarter over quarter.

<unk> revenue was down approximately 7% quarter over quarter and MLA revenue was generally flat relative to the June quarter.

Year over year pro forma combined company revenue was up approximately 34%.

But particularly strong gains in Isa and MLA.

For reference and relative to 2019 pro forma combined company revenue is approximately 9% below pre COVID-19 levels.

Page five of our slides have some additional data regarding revenue trends by region and by product line that you might find helpful.

As Mike noted industry wide activity is generally trending in a positive direction and that is also generally the case across our four regions.

As you will note from slide number nine the one region that is currently an outlier as our Mena region, which is a sizable business that generates very good margins largely due to the geographically concentrated nature of the activity.

The quarterly trend in Mena, However has been negative.

As we discussed in our Q2 earnings conference call operations in Mena have experienced COVID-19 related project delays and other COVID-19 related challenges over the last couple of quarters, including collection delays, which has resulted in a build of net working capital.

We do not have particular concerns relating to the collectability of outstanding accounts receivable and we expect that the working capital issue will sort itself out over the next quarter or two.

As a general levels of activity, we expect that our Mena business will begin to pick up in Q2 2022.

Given the desire of key operators to increase production.

It's a spare capacity and reduce emissions, we expect that Mena will be an engine of growth for both the industry and for Expro.

On a relative profitability basis as defined by Expro segment, adjusted EBITDA margin in Q3 for Isa APAC, Mina and MLA was approximately 22%.

18%.

24% and 20% respectively.

The quarterly trend is stable in regards to APAC and strongly positive in the Isa and MLA regions.

Segment adjusted EBITDA margin remained strong, but it has been on a downward trajectory over a couple of quarters as a result of lower activity.

<unk> reduced absorption of geography based support costs.

Again, we expect the activity trend to reverse in <unk>, 2022, and beyond which will have overhead absorption benefits.

The market has become more competitive and price sensitive.

Profitability has also been under pressure due to cost trends supply chain challenges regulation and startup cost on new work in Qatar.

Like the net working capital build startup costs are transitory phenomena, which should work itself out over a quarter or two.

We will continue to try to mitigate the other issues in Mena with cost discipline and by offering higher value added services and solutions, including production Debottlenecking as well as intervention integrity solutions, which include compression and metering.

In our coiled hose and our active potent annual intervention solutions.

Turning to the balance sheet, the combined company at no interest bearing debt at the end of Q3, 2021 and has no interest bearing debt today.

Pro forma combined company liquidity at quarter end was approximately $400 million.

Cash and cash equivalents, including restricted cash for the combined company at September 30 was approximately $270 million.

After payment of transaction related professional services fees and the settlement of a legacy Franks tax receivable agreement pursuant to the terms of the merger agreement <unk>.

<unk> spend in the $240 million area post closing.

Note that pro forma liquidity at quarter end also includes direct draw borrowing capacity of $130 million under our new $200 million credit facility, which was entered into in connection with the close of the extra <unk> merger.

And which replaced the respective credit facilities of Franks and legacy Expro.

The remaining $70 million of capacity on the revolving credit facility is available for bonds and guarantees.

We continue to be disciplined with cost and capital investment in order to create incremental structural efficiency.

Low cost scalable support functions and scope for improved profitability and cash flow generation.

Frank's is capital expenditures related to property plant and equipment totaled $3 $1 million in the third quarter and year to date totaled $7 $6 million.

<unk> continues to plan for overall capital expenditures during 2021 of approximately $15 million.

Legacy extra capital expenditures related to property plant and equipment totaled $15 $8 million in the third quarter of 2021 and year to date totaled $53 $5 million.

Legacy X Pro continues to plan for capital expenditures during 2021, and the range of $70 million to $75 million.

Capex continues to trend downwards with management, focusing on maximizing utilization of existing assets and where practical limiting new capital expenditures.

The combined company plans for capital expenditures during 2021, and the range of $80 million to $85 million.

Turning to interim guidance as we have discussed in various forums at least in the near term, we expect that higher revenue will be driven more by higher activity levels and by any material pricing traction.

Similarly margin expansion is expected to be driven by improved overhead absorption and merger related cost synergies. So again, we remain focused on optimizing support costs and the timely capture of our previously announced synergies really at all levels for the organization.

Looking ahead, we expect that the fourth quarter will also demonstrate solid operational and financial performance.

As Mike noted the key.

Company's current outlook for the fourth quarter of 2021 is for flat to mid single digit revenue growth and an adjusted EBITDA margin consistent with the definition used by legacy Expro of 15% to 17% of consolidated revenue.

As noted in our press release, the fourth and first quarters are typically seasonally weaker quarters due to reduced activity in the northern hemisphere.

Historically, a number of our NOC customers also tend to be slower out of the gate and starting projects pending the approval of their budgets.

Nonetheless, we continue to see strengthening signals of a multiyear recovery, which is which is expected to gain momentum as 2022 progresses.

In the near to intermediate term, we expect that revenue momentum will be driven by an uptick in shorter cycle faster return production optimization projects.

Which will most directly benefit our wealth management and.

And well intervention integrity product lines.

We also expect to see a strong recovery in offshore development beyond the next few quarters.

For which our well construction and subsea well access businesses are very well positioned.

To summarize our financial outlook, we believe our constructive fundamental backdrop that is supported by high and relatively stable commodity prices.

Global economic growth and plus five years, a very modest investment by operators and the replacement of produced reserves sets up the energy services industry and extra in particular for a multiyear recovery across geographies and product lines.

That said key customers are still finalizing the spending plans for 2022.

As we gain a better understanding of the plans, we will finalize our 2022 budget and provide the market with additional color on our 2022 expectations.

In the interim I will just note that the energy services market is moving in a demonstrably positive direction.

We believe a reasonable assumption for analysts and investors is that it will take a couple of quarters for the timing and trajectory of unexpected recovery to become clear.

As we bring the legacy Expro and Frank's organizations together.

We expect to recognize severance and other costs related to the rationalization of support functions and the consolidation of facilities.

As a result, while we are expecting a couple of noisy quarters. Overall, we are expecting plus 10% year over year revenue growth in 2022, and adjusted EBITDA margins in the high teens.

During the second half of 2022, we expect the revenue run rate to approach 2019 pre pandemic levels for the combined company.

With the benefit of fall through on incremental revenue and cost synergies adjusted EBITDA margins in the second half of 2022 should be in the plus or minus 20% range.

In conclusion extra remains dedicated to delivering maximum value to our customers by combining technology and knowhow with a culture built around safety service quality organizational efficiency and risk management.

As always our objective is to enhance long term value for shareholders employees partners and the communities in which we operate.

With that.

I will turn the call back over to Mike for a few closing comments. Thank.

Thank you Glenn I'm going to leave you with three key takeaways.

We believe Expro has an exciting platform with the scale diversity and financial profile to accelerate growth and provide through cycle resiliency.

At the core of our business and instrumental to our future success is our strong financial profile with a healthy balance sheet and ample liquidity significant synergy opportunities and a strong and sustainable cash flow profile. There's a lot of opportunities in front of us both internally and externally and I am excited for our future as one company and <unk>.

And our ability to deliver as we progressed through a multi year cyclical recovery. Thank you again, operator, let's go ahead and open it up for questions.

Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one telephone keypad when preparing to ask a question. Please ensure your devices on muted Luckily.

Today, we will begin our Q&A session with a few questions that we have received from our pre registered coolers.

Last question would you please share with US how you think about your capital allocation strategy.

Thank you Elliot right now our near term focus is really on generating strong free cash flow and competitive returns on invested capital I think we've really developed good plants, we will achieve these these overall objectives.

Fundamentally incremental scale makes us more relevant to both our customers and investors scale also provides us with an opportunity to rationalize our support cost consolidate our facilities and really be able to spread the cost of our global operating footprint across a bigger and broader.

Base of revenue in addition to improved overhead absorption the scale allows us to more efficiently invest in future facing technologies. They are ultimately required to participate in a more meaningful way in the energy transition and help and Additionally, it's don't really still be able to generate good free cash flow.

There are also a portfolio of benefits of the extra <unk> merger and that we are better exposed to the entire well lifecycle. The breadth of our services and solutions really provides us with a more frequent opportunities to engage with customers and ultimately to consider integration or bundling of our services.

Really confident that we will we will timely capture these cost and revenue synergies that have been communicated market and I believe that we will benefit ultimately from a tailwind that will be associated with recovery in both onshore and offshore drilling activity and as a result, I think we will have significant free cash flow upside ultimately, what we do with that cash will be a function of what opportunities are available to.

And of course, investor expectations will be a significant element of the decision making process. So the near term focus is on generating cash and we will go through a disciplined process with the board in terms of how we allocate any excess free cash flow.

Ultimately addressing dividend and buybacks is a bit premature for us at this moment.

No that we have good prospects for revenue growth to be able to expand margins and ultimately generate additional free cash flow.

I think it's also worth noting noting that are zero debt balance sheet and are currently strong liquidity position also provides us with a fair amount of strategic flexibility.

So ultimately.

The through cycle profitability and free cash flow will allow us to thoughtfully invest in our business, we can better position the company for long term success and have a constructive dialogue and next steps to enhance shareholder value when thats really appropriate.

The second question can you. Please provide some detail around the capital intensity of the combined business.

It's another really good question ultimately.

Another of the benefits of.

Frank's and extra combination is it the <unk> product lines traditionally have.

Less capital intensity at least in the near to intermediate term given the fact that we have some underutilized assets.

Particularly embedded into Frank's Trs type services.

My sense is that we have capacity within the Trs Trs business to generate revenue at or in excess of pre pandemic levels with very modest incremental capex investment and really that's going to happen through better utilization of the existing asset base.

Ultimately that said due to the complexity the equipment, some sometimes with long lead times for specialized equipment and a callout nature of some of the activity we have in well construction in some markets.

Opex commitments from the traditional well construction business are typically driven more by expectations for growth in demand.

More so than work that we know that that's already been awarded.

Ultimately in most of the Capex related requirements in the legacy extra extra business it tends to not be bespoke, it's more project specific.

And not speculative.

So we do require some capex requirements there.

But generally with the legacy Expro business, it's committed with a contract award in hand, and we have reasonable visibility on payback timing and those type things.

So as a general matter the legacy <unk> business will tend to be more build to market and for the legacy <unk> business it will be more build to contract.

And as we think about the combined business as we've kind of indicated previously we expect our capex will run somewhere in the kind of 7% to 8% of revenue range.

These levels of investment will allow us to build.

Ultimate sustainable business generate good free cash flow with expected increase in overall activity.

And really all things being equal with the degree of pricing traction capex as a percentage of revenue should come down a couple of percentage points.

In the future as well.

Our next question will come from the line of Taylor from Tudor Pickering Holt.

Your line is now open.

Okay.

Hey, Thanks, Mike Glenn.

First question is just on the 2022 outlook.

Can you guys hear me.

Yes, we can hear you fine go ahead Tim.

Yeah. So first question just on the 2022 outlook that you're talking about roughly 10% year over year revenue growth on a pro forma basis and you talked to.

Think about just the four geographic reporting segment that you talked about some of the near term issues you are dealing with in the Mena region likely a stronger back half type of environment for me then.

First half of 2022, but if you could just help us think about which geographic segments youre seeing the most.

Revenue growth opportunities for 2022 relative to that 10% target you put out there I suspect a lot of them will be second half weighted but I was just curious how would you rank the four geographic reporting segments for 2022 in terms of growth opportunities on the call.

Okay sure no. It's a good question you know what are the benefits we've had here with with the transaction is it's really given us a strong impetus to really engage with customers.

I mean.

Myself it had a tremendous number of specific customer engagements to talk about the transaction and talk about what we're doing and why we're bringing it together so it's really been a good.

A good reason to do that and also the fact that some of the world is starting to open back up for travel those kind of things allows us to have more kind of in person.

Dialog and engagement.

And I would characterize that overall is it's much more positive and much more constructive with customers today in terms of their kind of.

The future planning.

Much more positive discussions.

We're having more technical inquiries all those type things.

It's really it's kind of I think setting up well for that the difference in a normal year and then kind of a normal time by early November those would be we would be starting to see more and more of us translate into actual projects in actual awards and those type things.

It's a little bit slower right now and I think it's still the some of the overhang of the pandemic and folks going back to working in the office and those type things.

But I can tell you from from from North America, especially offshore we're starting to see some positive signs Latin America, Brazil in particular, I think that in the back end of 'twenty two going into 'twenty, three we're going to see some some growth.

We alluded to in the numbers, we have here we've had some some impact of COVID-19 related.

Things in the Middle East and North Africa.

Hopefully as we start to see more and more signs that the worst of the pandemic is kind of behind US I think we're starting to see more things kind of start to.

To frame up there and let's keep in mind that that Asia has been really dramatically affected by the pandemic probably more so in our experience than a lot of other global markets just because of the the timeliness of vaccine rollouts in some of those kind of things.

So I think all of those set up well, whether it's Latin America for some growth in the near term the Middle East Asia.

And we're seeing some strengthening in <unk>. The one that I think is going to continue to be.

Probably a little bit more behind the curve. So to speak is really going be sub Saharan Africa, a lot of that tends to because those are bigger projects. Those are much stronger capital investments from our customers, but with that said, we've seen a large number of technical inquiries and those type things.

So I think there's some positive opportunities in sub Sahara Africa, I, just think they're going to be.

A little bit slower to mature than what we're seeing in some of the other markets.

I think the only thing I would add here in the room.

We are on a pre budget basis.

Our customers are also finalizing their budgets. So the interim guidance I was giving us plus 10% year over year and as you point out our expectation is largely back end weighted I.

I guess as we sit here today.

And Asia Pac seem to be particularly strong markets for US is 2022 progresses and we'll come back to you with details as we finalize our budget.

Subsequent to year end, but.

The guidance, we were giving was plus 10% revenue year over year and I think if you look at <unk> 2022 versus 2021, it would be even a stronger growth profile.

Yes understood there thanks for that and a follow up just on a free cash flow. So.

You already explained sort of the pro forma capital allocation strategy.

No real follow ups, there I'm just thinking about that.

The cadence of free cash flow for the pro forma business. It feels to me like in the near term, you'll probably have some elevated merger and.

Integration type transaction cash costs.

A lot of the free cash flow potential of the business at least in the near term and probably more of a second week second half 'twenty two story when it comes to the meaningful positive free cash flow, but just wondering if you could help us think about when the business.

Once you get past some of these integration related items when the business returns returned to a positive free cash flow type.

Type business on a quarterly basis.

Youre right in regards to the timing of synergies capture.

I would envision it almost as a barbell.

Have some.

Support rationalization that will take place in the first couple of quarters out of the case is resolved we will have.

Severance and other friction costs in the first couple of quarters as a combined company.

Hopefully mitigating some of those cash requirements will be a reversal of the networking capital build that we've seen in the last couple of quarters, particularly on the legacy Expro side, where we have a more significant exposure to the NOC customer base.

So we will have a significant amount of.

Synergies that we think we can execute on the first couple of quarters that should get reflected in financial results as we get into say the second quarter of 2022, there's probably going to be some longer lead items that are driven by things like migration to a single ERP platform and things like that that would tend to be more backend weighted in 2022.

But again the goal is free cash flow generation and I think once you.

Adjusted for onetime costs like severance and facilities consolidation costs as we exit 'twenty two I think will be significantly the free cash flow positive, but as you pointed out it's going to take a couple of quarters for that to happen.

Thank you Taylor. Our next question comes from James West from Evercore ISI James Your line is now open.

Good morning, Mike.

Hey, James Good morning, Mike.

Hey, good morning, Mike.

You bet.

You have a good amount of travel recently.

To reopen.

I'd love to hear your characterization.

Your customer interactions we've gotten off.

When you're beating people with in person again, they're talking about their plans for 'twenty two 'twenty three I mean, your business is a little bit longer.

They need to talk about longer term trends.

Have those conversations gone how are they thinking about the next several years and how are they thinking about the merger.

Grow with Brexit.

James Good really good question I can say it has been.

Historically, a trials an awful lot and always spent a lot of time in the regions and those type things and it's been quite it's been quite nice to be able to go back and do some of that I was in Brazil for.

For a week here.

Just a week ago so.

What I would tell you is I'll answer the second part of your question first the customer response and the customer feedback on the merger has been exceptionally positive.

I could characterize it as their commentary has been if you remove the Colorado coveralls, because keep in mind Frank This historically been green Coveralls and extra has historically been blue cover all a number of half jokingly told me if I remove the color of the cover all it's the same people very focused on customers very focused on server.

Quality very focused on HSE performance and so there's still a lot of very similar personality traits and both of us at both companies at heart.

Our service companies has been very well received.

I want to understand a little bit more about why does it make sense and we can talk more about through cycle and the fact that we can add some more resources and we can continue to leverage some of the some of the engineering investment that we've done both companies. It can be transported to the others. So we've had really really good positive discussions around that transaction.

Overall with their level of activity.

I think theres still some just some cautious.

Some cautious dialogue and cautious conversation and whether it's caution because keep in mind, especially internationally.

We still have customers, who have not gone back to work in the office full time or if they have they are not working in the office full time part time.

Theres still some some caution around.

Just what's going to happen with the pandemic I think everybody is getting more and more confident that maybe we've got the worst is behind US and then I think for them. They are fundamentally trying to really understand.

The continued commentary from OPEC, and what's going to happen to supply there and what's going to happen with commodity pricing.

I think I'm really hopeful that what's going to happen here over the course of the next.

Five six weeks as we start to see more not just positive discussion from customers. We obviously start to see that translate into okay. We're going to sanction project X or we're going to pick up.

<unk> rig.

We'll then hear the planning phase over the course of the next four to six weeks will help us have a little bit more clarity around that but it certainly all the fundamentals seem to be translating into that but it is it translate yet into a dramatic increase in the contracts being signed in contracts being committed frankly, no, but I think as all of the.

As you hear the commentary from lots of service guys and the sector. The fundamentals seem to be setting up and there is a more constructive conversation more constructive dialogue.

Right, Okay that makes sense.

With respect to pricing.

We mentioned pricing wasn't included in the kind of the expectations for 'twenty two.

Is that a.

Sure capacity in your product lines.

Just to be conservative kind of how are you thinking about pricing for your products and services.

At this point as we move into what should be a pretty healthy upward.

Well I'll start then I'll, let Tom I'll, let Gwen.

Jump in as well, so we fundamentally basis.

As we're going through and put together our budgeting those types of things, we're not going to count on pricing too.

To save US, we've got a chunky level of synergies that we've committed to and we need to stay focused on that so we need to keep things.

Kind of equal so to speak from year to year.

And we keep by the nature of how we bid our activity and how we engage in our global markets, we havent really good sense of.

Witness supply starting to tighten from a service side when do we start to see pricing movements, how at what our customer behaviors. So we haven't really got a handle on that and we're just we're just not seeing those kind of things that I think we're seeing outside of North America I, just think theres very few indications of pricing traction, but with that said we will absolutely do.

Our part once we start seeing the opportunity with the tightening of services or more.

And activity set will start moving pricing as soon as we can we're just not going to count on that.

<unk> to give us some margin improvement because we got a lot of wood to chop so to speak on taking costs out and we want to make sure we stay focused on that.

Glenn.

Mike's executive right.

The oilfield inflation that has been discussed over the last weeks and months is largely a north American phenomenon, we've certainly had logistics challenges in Mena and elsewhere.

To the extent that we have an increase.

Or equipment or other costs, and we will certainly try to pass onto the customers, but I was really referring to is the ability to push price as a driver of margin and I don't think we're there yet right, but as Mike says when we can push price, we'll push price, but I think the other thing that I would underscore, particularly given some of the recent commentary.

From some of the other public.

<unk> companies is that we try to design our cost structure.

<unk> capital commitments based on our revenue reality as opposed to a revenue aspiration and that's true on the upturn as it is in the downturn. So when we see signs of.

Market that can absorb more equipment will certainly bring more equipment online, but we're not going to go out and build a bunch of capacity in hopes that the market is going to bail us out.

Okay.

Our next question comes from David Anderson from Barclays. David Your line is now open.

Alright, Thanks, guys good morning, Mike.

Well, the well testing business not a business we've had a lot of.

Kind of exposure to over the years. So maybe just kind of help us understand kind of some of the drivers in there we understand kind of the well construction and how that's kind of leverage you more on that.

And kind of really the deepwater rig activity in the subsea part we get all of that but how does the well testing work, particularly as it relates to ups.

Upstream spending because I guess people are probably a lot of it's not.

10% number.

It sounds a little bit lighter than you're probably hearing kind of odd international spending next year as we have kind of that mid teens. So what we're doing so it's a different function a little bit later cycle.

Little bit longer and therefore kind of last longer you could take a little bit like just help us understand the dynamics of that business.

Very helpful. Thank you sure.

It's a great question and your last kind of status and there was really spot on this is more a matter.

I've kind of the timing.

Exploration appraisal activity by the time you actually go in you complete wells you start to test that may start to do is kind of thing thats, a little bit more of a of a mid cycle.

Significant revenue generation and Thats. The reason why we are probably going to see us.

The wealth the wealth management side be a little bit more later cycle just in terms of recovery.

Could you kind of have I try to look at the well testing wealth management business really in two elements. One is more of that initial exploration and appraisal and we're starting to see some early indications of.

Exploration projects start to pick up.

Seismic activity those type things are starting to starting to increase and Thats a really good leading indicator for seismic happens and then you start to have DNA activity beyond that and then for US the really the second element is around more of the.

Production optimization production enhancement, which is really existing.

Existing well stock as you start to see so so that kind of stays stable and that tends to be more of an inflationary change and improvement in that portion of the well testing the strong growth activity comes with with a kind of early cycle post drilling post completion, then you start to test wells and bring them online.

So is it fair to say that.

Butter part of your revenue is in that production side, though on the West coast.

That certainly has certainly has become a very much a solid base of our revenue today.

Historically in more normal times.

Exploration and appraisal activity would be.

Circa 20% to 25% of our revenue set today.

Today, if you will.

Mostly its mid single digits and frankly, it's not because we've lost market share. It's just because of the customer activity and investment in DNA type wells, there's just not a lot of that kind of activity today. So as you start to see we've got a good base level of workflow management, we still have the resources the expertise the knowledge to be able to go out and provide a strong.

Services as the EAA type activity starts to ramp back up.

Got you.

My other question is kind of looking at legacy Expro.

Just kind of look at kind of bigger picture kind of where your overall margins have trended since 14 kind of the peak of offshore and kind of there to kind of we've sort of hit kind of a kind of level of last few years help us understand a little bit about kind of normalized margin.

Syed.

I understand all the cost synergies, but aside from the cost synergies.

Should we think about kind of legacy X ROE and kind of where you think that business should be let's say in kind of two to three years when things kind of start picking up I'm just trying to understand the differences between the business because I know there's a lot of teams I know you've moved more onshore in that business, but just a little help.

Respective I guess in terms of where margins should go on a normalized basis.

It's quite Fanning Dave.

Great question and at least where we sit today to some extent unknowable.

Business has changed significantly from the 2014 to 2016 period, which was very much offshore sub.

Subsea driven and at least back then it was largely a subsea completions business that extra week plus known for in addition to the Eni driven well tests.

And as you can see the combined.

<unk> legacy businesses has been less volatile than the Franks business, which has got significant operating leverage to it we've bounced in the plus or minus.

<unk> 40, 42% Zip code.

Legacy export basis.

Ultimately implied.

Teen type.

Adjusted EBITDA margins can we get back to the.

Hi, <unk>, 30% I guess, it's theoretically possible, but that's not what we're planning around today.

So we've got really two businesses that will be driven by.

Customer Capex and Thats, the well construction business I E.

The legacy <unk> business, and our subsea test tree or subsequent <unk> business and then you've got elements of wealth management that Mike was just talking about that will benefit from a capex cycle.

Interventional integrity large elements of wealth management.

And increasingly subsea well access is more production optimization centric and I think the.

The nature of the customer spend will ultimately drive the margins, but I don't think where we sit here today I can give you guidance beyond our expectation as we get into that $1 three plus or minus.

Revenue on a run rate basis, we see ourselves getting the plus or minus 20% EBITDA margins and I think thats consistent.

Our nomenclature.

3% to 45% contribution margins.

And I guess, the one thing I would add David is that's one of the reasons why.

I mean, because of the way, we bid and organize our global product lines.

We can we can dial in our pricing well and will make pricing movements and adjustments absolutely when the market is ready for it.

And it's a little bit unknown based on when does their customer increase in activity and tightness of supply of those kind of things, but the here and now that we have is very much around the cost synergies and thats why we are absolutely fundamentally leaning hard into we've said, we will take out 55 million of run rate cost synergies.

Okay.

Four quarters. Following closing, we absolutely will be able to do that we can control that we have really good line of visibility of the cost and the facility consolidations and all those type things, we've really been able to put together a really solid execution plan and that right. There is going to give us some.

Some controllable so to speak margin expansion and.

Well, let us be able to by the time, we get into the fourth quarter of 'twenty, two and we start to the customer activity pick up we're not going to be focused internally on cost synergies no sign of things, we're going to be focused on customers and projects and how do we go out and execute and how do we capitalize on an opportunity.

It's more robust.

This concludes today's conference call. Thank you for participating you may now disconnect.

Yeah.

Okay.

Hum.

Yeah.

Yeah.

Right.

[music].