Q4 2021 Pason Systems Inc Earnings Call
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Good morning, My name is Miranda and I will be your conference operator today.
At this time I would like to welcome everyone to pieces systems, Inc. Fourth quarter 2021 earnings call.
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Additional information about pieces system.
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Thank you.
Mrs. Boston You May now begin your conference.
Thanks, operator.
Good morning, and thank you for attending pathos fourth quarter 2021 conference call.
I'm joined on today's call by John <unk>, our President and CEO .
I'll start today's call with an overview of our financial performance in the fourth quarter and 2021 fiscal year.
John will then provide a brief perspective on the outlook for the industry and for PE Fund.
We will then take questions.
2021 represented significantly improved industry conditions across all of our major end markets.
Our financial results demonstrate our strong operating leverage and continue to reinforce the decisions made through the downturn to maintain and build our service and technology platform strengthening our competitive position through the recovery.
Exxon generated consolidated revenue of $62 8 million in Q4 of 2021, and 92% improvement over the fourth quarter of last year, which represents at the beginning of recurring industry activity levels.
North American industry days, although still well below pre pandemic levels increased by 83% during the fourth quarter of 2021 compared to the fourth quarter of 2020.
The company held onto its record North American market share in the fourth quarter and continued to benefit from improved pricing conditions in comparison to the challenging environment throughout the downturn.
Accordingly revenue per industry day grew by 6% year over year from 721 in the fourth quarter of 2020 to 767 in the current quarter, representing a new record quarterly level for the company and a result that is well ahead of the 738 generated during pre pandemic activity levels in the first quarter of 2020.
Resulting north American revenue was $50 5 million for the fourth quarter and 92% improvement from the fourth quarter of last year.
And a result that outpaces improvements in underlying industry conditions.
Industry conditions in international end markets also improved revenue generated by the international business unit was $11 2 million in the fourth quarter and 95% improvement from the fourth quarter of 2020.
Energy tool based our emerging business in the solar and energy storage market continues to make progress.
Reported revenue in this segment with a one 1.2 million in the fourth quarter. The highest quarterly level 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 our related hardware sales.
Yeah.
<unk> generated $24 2 million and consolidated adjusted EBITDA in the fourth quarter of 2021, a significant improvement from the $8 2 million generated in the fourth quarter of last year.
As the industry recovers and as our outlook continues to improve we are making investments and incurring certain costs in anticipation of future revenue increases primarily as it relates to equipment repairs on people.
Further as timing on deliveries of capital equipment purchases are difficult to predict given the ongoing supply chain challenges. All industries are facing we are remaining especially proactive with repairs of existing fleet and technology, which has put some pressure on our fourth quarter adjusted EBITDA margins.
However, many of our operating costs remain fixed in nature, and our operating leverage remains strong as our fourth quarter. Adjusted EBITDA results represents 38, 5% of revenue generated in the quarter. A result that in years pre pandemic adjusted EBITDA margins.
As we've previously communicated incremental margins will fluctuate as the industry recovers that certain costs will be incurred in anticipation of future revenue increases and fourth quarter incremental margins demonstrated this effect as we scale our operations to support higher levels of activity.
On an annual basis pesos generated $206 7 million in revenue compared to the $156 6 million of revenue in 2020.
Adjusted EBITDA generated in 2021 was $72 5 million or 35% of revenue compared to $39 5 million or 25% of revenue in 2020.
Resulting net income attributable to pace on for the 12 months ended December 31, 2021 was $33 8 million or 41 per share a significant increase from the $6 6 million or eight cents per share generated in 2020.
Although activity levels continue to be well below pre pandemic levels. A comparison of the annual results demonstrates the recovering industry conditions coming out of the lowest experienced in 2020.
Our balance sheet remains strong and incredibly well positioned with $158 3 million in cash and cash equivalents at the beginning at the end of the year and no interest bearing debt.
We continue to make investments in our core business to support increased activity levels in 'twenty 'twenty. One piece on spent $10 9 million in capital expenditures relating to maintaining and refreshing our existing technology.
Furthermore, as revenue levels have increased we've made corresponding investments in working capital while remaining diligently focused on maintaining strong collection trends.
Resulting free cash flow in 2020 , one was 55 million, which reflects these investments made during the year.
Hey, so on returned 25 million to shareholders through dividends and share repurchases. During 2021 as we look to signs of continued recovery, we are increasing our quarterly dividend to <unk> <unk> per share and 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, we are very proud of our fourth quarter in 2021 results, which reflect our leading market presence our strong operating leverage through improving activity levels in our pristine balance sheet. We continue to be in a position of excellent competitive and financial strength I will now turn the call over to John for his comments on our outlook.
Thank you Celine.
So we didn't noted our fourth quarter financial results reflected peso on strengthened competitive position together with the continuation of improved drilling industry conditions.
Through the depths of the downturn, we made the decision to maintain and to grow our leading service and technology capabilities.
In 2021 these capabilities gave customers the confidence to award pace on its highest north American market share in the company's history, and we exited 2021 with record quarterly revenue for industry day.
We expect to build on that position of strength heading into 2022 and as industry activity remains poised to continue its path of continued steady growth in the coming quarters.
Customers are looking to automation and analytics technologies to improve their operational performance and peso and remains optimally positioned to provide the high quality drilling data on which those technologies rely.
Leading indicators of drilling activity suggests that the growth witnessed over the past year will continue.
Oil prices remained over $90 per barrel for the first time in seven years and industry analysts expect prices will breakthrough $100 per barrel this year.
The energy information administration is calling for oil demand in 2022 to surpass 2019 levels.
Meanwhile, oil production in the United States remains approximately 10% below pre pandemic levels.
Crude oil and petroleum product inventories are at their lowest levels in more than five years.
The United States has been releasing oil from the strategic Petroleum reserve in response to the elevated oil prices, putting further pressure on storage levels.
OPEC plus countries are falling short of their targeted production levels and industry analysts estimate that OPEC plus spare capacity is decreasing.
The inventory of drilled but uncompleted wells has decreased every month for the past 18 months and is now the lowest it's been in eight years.
U S land drilling activity was flat or increased in 50 out of 52 weeks in 2021.
While the U S land rig count has increased by an average of five rigs per week since the start of 2021, yeah. It remains approximately 290 rigs below the 2019 average rig count.
Supply and demand fundamentals are constructive for oil prices and for drilling activity in the coming quarters.
A significant supply response seems unlikely given current challenges around the availability of labor supply chain disruptions and underinvestment in larger long term development projects over the past five years.
E&P companies remain committed to disciplined capital spending within cash flow.
As their free cash flow sees significant increases at higher oil prices. They are able to maintain strong balance sheets returned capital to shareholders and increased capital programs.
And as long as well equipped to participate in the continued industry growth.
Yeah.
In our solar and energy storage efforts, we expect revenue to increase as the growing backlog of control system sales are converted into revenue as projects are commissioned.
Across our business, we will make the necessary investments to position ourselves to realize future revenue gains.
Our operating costs, most notably personnel and equipment repairs will see increases as a result of anticipated further activity gains and prevailing interest rates.
We will invest in research and development efforts to drive continued market share and pricing improvements as we deliver additional value and functionality for customers.
Our 2021 capital program came in at approximately $11 million with certain equipment purchases delayed by supply chain shortages and delays.
As a result, we expect to spend up to $30 million in capital expenditures in 2022, which includes $5 million of planned expenditures carried forward from 2021.
We will continue to evaluate our capital programs in the context of future opportunities to evolve our product and service offering while navigating continued supply chain challenges.
Our balance sheet remains strong and our free cash flow generation continues to improve.
We will continue to allocate capital by making investments and maintaining our leadership position in our existing drilling related markets.
<unk> ourselves for future growth in new and growing markets and returning capital to shareholders.
As our cash flow generation and outlook improves we are able to increase shareholder returns and as such we are increasing our quarterly dividend from <unk>.
Two eight <unk> per share.
Our regular dividend payments represented a lower percentage of free cash flow than they did prior to the pandemic.
And moving forward, we will continue to balance growth and the dividend with maintaining flexibility in our capital allocation to allow us to pursue attractive organic or inorganic growth opportunities.
We remain focused on ensuring that pace on as an innovative profitable and responsible company.
And we would now be happy to take any questions.
Thank you we will now begin the question and answer session.
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One moment for your first question.
Your first question will come from Michael Robertson with National Bank Financial. Please go ahead.
Good morning, John and saline and congrats on another solid quarter here.
Thank you Michael.
I was wondering if we could start with the the solar and energy segment.
I was hoping if you could give us an idea of how sticky are those subscription relationships tend to be maybe in terms of average subscription length or maybe the level of turnover you tend to see.
So the subscription side of the business makes us economic modeling and the proposal generation tool that business is quite sticky right. So those are solar project developers largely who are using that for a lot of the proposals that they are putting out for projects and we've seen very little turnover in that part of the business.
But that's great it sounds like some some nice recurring revenue there.
The other.
I wanted to touch on this morning.
Hugh.
You noted some increased market share I was wondering if you could provide some more color on what youre seeing there.
If it was being driven by clients.
With which you've had existing relationships representing up a bigger percentage of the active rig count or is that from making inroads with new clients or maybe a combination of both.
So again I think we pointed in the past as the various things that drive market share. One of course is we've been a net beneficiary of consolidation where.
Companies, who have had a preference for pace on have acquired companies, where we may have had lower penetration and so as a result, we ended up picking up a little bit more market share when those people are consolidated the industry.
We have certainly had some cases, where we've grown our share of our customers. So there's somebody who gave us a share of their business and now they're giving us a larger share of their business and then we've had on balance I would say more you think about winning and losing logos. We probably won more than we've lost on the logo side.
One of the prevailing themes that we're hearing when we think about the market share gain to answer a question you didn't directly ask Michael is the growing move to use data drives a lot more interest in some of these data delivery products in some of those office space types of products that we've been spending quite a bit of time and effort on the last few years and so I think that's been really.
Helpful. In when you think about getting larger shares of customers getting more customers and kind of being a prevailing provider on the back of consolidation a lot of that has been driven by the data delivery side.
Got it that's a that's really helpful color John I appreciate that it sounds like there's a there's a few different angles there.
Maybe just a follow up to that are the the gains in market share you're seeing a relatively broad based or.
Are there standouts in terms of a particular geographies or basins.
I don't know if there's any particular standouts I think clearly if you went back five years, we've had significant inroads in the Permian right. The fact that we've been able to grow market share to the highest level, we've ever seen and when historically, we would have had lower market share in the Permian.
Speaks to outperformance within that that particular basin or where market.
Outside of that I don't know, what I would point to any specific.
Types of customers or basis.
Got it got it.
Alright, well thanks for taking my questions I will turn it back.
Thanks, Mike Thanks, Mike.
Your next question will come from coal Pereira from Stifel. Please go ahead.
Good morning, everyone.
So our labor availability across the space remains an issue as you outlined but I'm wondering if you view labor shortages for the contract drillers as a bigger impediment to growth first for peso on specifically.
Yeah. That's a great question call I think the challenges around labor as you've highlighted our prevailing across the whole space for energy services companies and clearly we think that that is one of the things that sort of mitigates the growth rate and makes it a little more sustainable maintainable this steady growth rather than rapid growth in response to oil prices.
But the mere fact that a drilling contractor has multiple people on location, where we have one technician on multiple locations would imply that the labor availability challenges of some of our customers are probably a bigger challenge in terms of growth.
Then our own availability of labor.
Okay perfect that's great color. Thanks.
As well just wondering if you're able to maybe put some bookends on how we should be thinking about R&D expenses moving forward.
Yeah, Great question I think.
You look at R&D, we've clearly been putting more into R&D as we've seen opportunities to provide product.
The data delivery side is driving a lot of the market share side, but there are some other things on the R&D side, where I think we're getting real traction and opportunities to commercialize things and that shows up as new.
New revenue through market share or through product adoption or price, we see more of that so we'll continue to make investments. There I think if you look at the second half of 2021.
It's probably a good baseline to think that will roll off of as we think of kind of run rate effects and then maybe some future growth off of that.
As opposed to just looking at a full year.
Year over year.
Okay, perfect that's great color.
That's all for me, Thanks, I'll turn it back.
Thanks, Paul.
Your next question comes from Keith <unk> from RBC capital markets. Please go ahead.
Hi, good morning, John and saline.
Thank you Keith.
Hey, I imagine it varies by product and geography, but how close has pricing come to returning to pre pandemic levels.
So it is below pre pandemic levels in all geographies still.
So we've been able to get some price back now we don't generally think of kind of restoring price without bringing some additional functionality feature and benefit to customers. So it's always a little bit challenging to say how.
How much is price come back on a like for like basis, because we're trying to evolve the product due to justify asked for a little bit more on the price side. So.
It's a bit of a tricky question, but I would say that it does feel a little bit below the pre pandemic levels.
Got it fair enough and.
Just curious what is the pathway for EBITDA margins to get back to.
That mid 40% range that we saw kind of 2018 to 2019.
Rig counts need to return to those levels. We saw then or or do you think you can get margins back to back to that level in a lower rig count environment.
Yeah, Hi, Keith So I mean, as we said before it back in the second quarter of 2020, we did size of the business for about five to 600 U S land rigs and obviously, we've clearly now exceeded that level in our outlook continues to grow well beyond that though I mean, we will see some margin compression as we do scale for that next level of activity, we did see that in the fourth.
And we do expect to see some continued pressure on incrementals in the next couple of quarters, but look we we see that as a good problem to have given what it means for future results and we still feel that you know, it's very reasonable to believe that we can chip away at getting back to pre pandemic adjusted EBITDA margins in the low to mid Forty's throughout the course of I'd say this year and next.
We're kind of thinking towards that eight to 900 U S land rigs again.
Got it okay, Okay, perfect and one last one for me can you just maybe break down the $30 million capex spend as far as you know the five or so million carryover.
Maybe 10 or so million of maintenance and then what is the additional the additional growth allocated to and and if you could just kind of break that down as far as what you're you know what you are planning to.
To get for that.
The Capex expense.
What was the other number of things that show up in our Capex Keith right. So of course, you have equipment and when you think about equipment. There is kind of the the refreshing of existing equipment with similar equivalence. There is the evolution of equipment to kind of next generation. If you will and then there is the rollout of new pieces of equipment, and so theres a little bit in each.
Of those categories and then the other part is frankly around things like trucks for fuel technicians were the fact that look at the global vehicle shortages and supply chain issues that has had an impact on our ability to sort of maintain our normal cycle of vehicle replacement overdrive and so we'd probably have a bit of a backlog of spend on on things like.
Trucks as well so.
So I don't know if theres any one particular product or a category that would sort of stand out relative to the others. It's fairly broad based against those four categories. If you think of trucks that equipment being kind of like for like next generation and new type of product.
I don't know <unk> is a little more color to put on that.
I think as image the majority of that 30 million is maintenance Keith.
Yeah.
Yeah, Okay. Okay got it thanks for the color that's it for me.
Thanks, Steve.
As a reminder, should you have a question. Please press star followed by the number one.
Your next question would be coming from John Gibson from BMO capital markets. Please go ahead.
Good morning, Celine and John and congrats on the solid run here.
Thanks, John .
First off just internationally your numbers continue to move up or are you seeing market share wins and pricing gains in various international markets or is it more just to do with generally higher activity levels.
Yes.
Yes.
I guess it's.
Wouldn't necessarily call it pricing gains as much of activity type mix. So in some of the international markets, we have a mix of kind of drilling.
Drilling activity in Workover activity, where we're involved in both and as the mix moves a little bit more towards drilling that would benefit us in terms of the revenue we would see.
It's not so much a price, but it is clearly a driver of revenue per day based on the type of work, they're doing and so so that's been a beneficiary.
We've had some market share gains in some of the international markets, but I think it's probably more a question of overall just the activity levels are increasing and then something around activity type mix.
Got it okay.
And then last just on.
On the dividend it was obviously nice to see the increase this quarter.
Previously you've kind of guided to moving the dividend up in tandem with rising activity levels and obviously a financial performance. So can we assume the strategy will continue.
Particularly given where rig counts are tracking and then.
Maybe I guess more specifically, where we need to see activity levels move in order to see another increase.
So if you say the strategy of continuing to have to be careful to clarify what you mean by the question John right. So when we reduced the dividend by 75% one of the things we talked about was that we expected the dividend would represent a lower percentage of free cash flow going forward than it had in the past to them.
Allow ourselves more flexibility in capital allocation. So that strategy I think will continue and we would tend to look at growth in the regular dividend against what is growth in free cash flow over the cycle that we would see kind of moving forward look like so I don't think we will just instantly respond to annual changes in <unk>.
Free cash flow more taking a look at what do we think of cycle looks like and what's appropriate for growth of the dividend in that context, while maintaining it as a lower percentage of free cash flow than it would have been pre pandemic.
I guess, if you could get more specific what would be that sort.
Sort of percentage threshold, you're looking at now a free cash flow versus pre pandemic levels.
Well I don't think the board has established at what level. The next dividend move would happened. It's something we look at every quarter to say what is our outlook and what do we feel is the appropriate dividend. So I don't think it would be appropriate for me to give you a specific level.
<unk> doesn't have that conversation around a specific level.
Fair enough.
Again, congrats on a good quarter and I'll turn it back.
Thanks, Ron.
There are no further questions at this time. Please go ahead.
Great. Thanks, very much for joining us on this morning's call. We appreciate your interest as always if you have any follow up questions certainly feel free to reach out to Selina or myself at your convenience and otherwise we'll look forward to speaking to you again after the first quarter results.
Have a great day.
This concludes your conference. Thank you everyone you may now disconnect.