Q2 2022 Pason Systems Inc Earnings Call

The.

The.

22 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to draw your question, please press star, then 2.

Thank you. The contents of today's call are protected by copyright and may not be reproduced without the prior written consent of Payson Systems Inc. Please note that the advisory is located at the end of the press release issued by Payson Systems yesterday which describes forward-looking information. Certain information about the company that is discussed on today's call may constitute forward-looking information. Additional information about Payson Systems, including the risk factors relevant to the company, can be found in its annual information form.

Thank you. Ms. Boston, you may begin your conference.

you may begin your conference. Thanks, Joanna.

Good morning everyone and thank you for attending PACEON's 2022 Second Quarter Conference Call.

I'm joined on today's call by John Faber, our President and CEO . I'll start today's call with an overview of our financial performance in the second quarter. John will then provide a brief perspective on the outlook for the industry and for Payson, and then we'll take questions.

Our second quarter results reflect a continuation of improved industry conditions and also reflect our strong competitive positioning, operating leverage and balance sheet.

Payson generated consolidated revenue of $74 million in the second quarter of 2022, a 69% improvement over the second quarter of last year.

With this revenue, PaySUN posted $31 million in adjusted EBITDA, which represented 42% of revenue, a significant increase from the $13 million, or 29% of revenue generated in the second quarter of 2021.

All of the company's business segments contributed to this strong quarterly result.

North American revenue was $60 million for the second quarter, a 71% improvement from the second quarter of last year, and a result that once again outpaced the improvement in underlying industry conditions.

Revenue per industry day in our North American business unit was $801 in the second quarter, which although down slightly from the new record set in the first quarter of this year of $835, was still over the $800 mark for the second time ever in the company's history.

As we mentioned in previous calls, revenue per industry day in North America will fluctuate with seasonality effects of drilling activity in Canada, and we saw this effect in the second quarter when comparing to the first quarter record level.

That said, second quarter revenue per industry day of $801 represents a 10% increase from the levels seen in the second quarter of 2021, for which the increase is driven by improved product adoption along with a more favourable pricing environment as activity levels have continued to recover. For more information on COVID-19 vaccines, visit www.covid19.com

Similarly, activity levels in international end markets also improved and revenue generated by the International Business Unit was $12 million in the second quarter, a 58% improvement from the second quarter of 2021.

It's also worth noting that in the second quarter, our International Business Unit generated the highest level of quarterly revenue since 2015.

Energy tool base, our emerging business in the solar and energy storage market, generated $1.7 million in the second quarter of 2022 in revenue, a 94 percent improvement from the level seen in the second quarter of 2021.

Similar to the first quarter, reported revenue for energy tool base begins to incorporate revenue generated by control system and related hardware sales.

Quarterly revenue for this segment will fluctuate with the timing of commissioning of control systems.

As the industry recovers and our outlook remains positive, we will continue to make investments and incur certain costs in anticipation of future revenue increases.

primarily as it relates to equipment repairs and people.

Specifically, we continue to be especially proactive on the repair of our existing fleet and technology as we grapple with ongoing difficulties in predicting timing on deliveries of capital equipment purchases.

Further, we are managing inflationary effects on certain components of our cost structure. That said, our second quarter adjusted EBITDA of 31 million, or 42% of revenue, does mirror pre-pandemic levels and in fact is very similar to levels that we saw in the second quarter of 2019 with 23% less North American land rates.

Net income attributable to pay-for-the-three-months ended June 30, 2022, with $18.5 million, or $0.23 per share, a significant increase from the $5.3 million, or $0.06 per share, generated in the second quarter of 2021.

Year-to-date, Paysong generated $148 million of revenue, a 72% increase from $86 million in the corresponding 2021 period. Adjusted EVA for the six months ended June 30, 2022 with $64.3 million or 43% of revenue, compared to $26 million or 30% of revenue for the first six months of 2021.

Accordingly, net income attributable to PASON in the first half of 2022 was $37 million or $0.45 per share, up from $0.95 million or $0.12 per share. A comparison of year-to-date results continues to highlight the improved industry conditions, higher levels of revenue generated per operating day, and strong operating leverage.

Our balance sheet remains strong and incredibly well positioned to make strategic investments within our core business.

We ended the quarter with $187 million in cash and cash equivalence and no interest-bearing debt.

In support of increased levels of activity, we continue to make investments in our core business. We mentioned last quarter that we would be making strategic and proactive investments in inventory levels of components and supplies in an effort to mitigate the impacts of ongoing supply chain challenges.

In the second quarter, that included $2.4 million in inventory investments, and we expect to continue with this strategy in the coming quarters.

Further, in the second quarter of 2022, Payson spent $6.5 million in net capital expenditures relating to maintaining and refreshing our technology platform.

The resulting free cash flow in the second quarter was $19.1 million, a 237% improvement from $5.7 million generated in the second quarter of 2021.

We remain committed to shareholder returns and in the second quarter returned $8.1 million to shareholders through dividends and share repurchases.

In summary, we are very proud of our second quarter results, which reflect our leading market presence, our strong 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 over to John for his comments on our outlook.

Thank you, Celine.

Our second quarter financial results reflected our strong competitive position and the continuation of the steady growth and activity as the industry has recovered since bottoming in the third quarter of 2020.

As Celine noted, our consolidated revenue and adjusted EBITDA on the quarter were nearly identical to our results in the second quarter of 2019, despite industry activity being 23% lower in the second quarter of 2022 as compared to the same period in 2019.

We expect to build on the advancements that we have made in our business over the past few years.

We are well equipped to provide the drilling data and technologies that our customers are increasingly using to deploy automation and analytics to improve their operational performance.

In recent months, the macro environment has become more challenging as central banks attempt to bring down high prevailing levels of inflation by raising interest rates while trying to avoid putting economies into recession.

The world is wrestling with a global energy crisis with significant shortages and elevated prices in many countries, and at the same time geopolitical instability has placed an increased focus and attention on where commodities are sourced.

Oil prices have become more volatile as traders weigh the implications of supply shortfalls against the potential demand destruction from an economic slowdown.

Against that more challenging backdrop, we remain confident that the North American land drilling activity will continue to trend slowly and steadily higher in the coming quarters.

Global oil demand is now similar to pre-pandemic levels and while there are growing concerns about potential demand impacts from a recessionary environment.

Supply factors may overwhelm those demand impacts.

In previous cycles, high oil prices have led to significantly oversupplied markets.

In the current situation, however, major sources of supply are below pre-pandemic levels and trending lower.

US storage levels of crude oil and petroleum products are at levels last seen in 2008.

Since the beginning of April , the United States has released approximately 800,000 barrels per day from the Strategic Petroleum Reserve to help meet demand. However, that program is currently scheduled to end in late September .

Today, the reported inventory in the Strategic Patrol and Reserve sits at the lowest level since May 1985, more than 37 years ago.

US land production remained almost 10% below pre-pandemic levels.

Inventory of drilled but uncompleted wells, something we call ducts, in the United States has decreased for 24 consecutive months to its lowest level in more than nine years.

The pace of decline has significantly slowed over the past few months, suggesting that the duck inventory may be plateauing at a minimum level.

There is a finite limit to how much supply can come from drawing down on storage and uncompleted well inventories.

Any new wells being prepared for production to slow the drawdown of inventories to meet demand will require new drilling.

As a result, we expect land drilling activity to steadily grow over the coming quarters.

In our solar and energy storage efforts, we expect a growing number of control system installations and increasing recurring monthly revenue from subscriptions to our economic modelling software package to contribute to revenue growth.

Across our business, we will make the necessary investments to position ourselves to realize future revenue gains.

Our operating costs will see increases in anticipation of further activity gains and prevailing inflation rates.

We will invest in research and development efforts that drive continued market share and pricing improvements.

We continue to plan to spend approximately $30 million in capital expenditures in 2022, though global supply chain shortages and disruptions are impacting delivery schedules.

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.

We are pursuing opportunities to mitigate the impact of supply chain disruptions by strategically increasing our inventory of equipment components and parts further in advance of anticipated repairs and equipment builds.

Our balance sheet remains strong and our free cash flow generation continues to improve.

We will continue to allocate capital by making 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 committed to returning capital to shareholders through our regular quarterly dividend, which we are maintaining at 8 cents per share.

through share purchases.

We remain focused on ensuring that Payson is an innovative, profitable and responsible company.

And we would now be happy to take any questions.

Thank you. First question comes from Keith Mackey at RBC Capital Markets. Please go ahead.

Hi, good morning and thanks for taking my questions here. Just maybe wanted to start off, John , curious for your thoughts on where you see North American rig counts trending through 2023. I know you expect them to gradually improve, but maybe you could put a little bit more of a range or a finer point on what you expect to see in the market.

Of course, my crystal ball is no better than yours, Keith, right? So I think if we're talking about the U.S. land market in particular, which is of course the vast majority of our activity, we would have seen a world prior to the pandemic that was in that higher 800s, lower 900s sort of range. I can see us getting back to that range. The question is how quickly and I think that's ultimately going to be constrained a little bit by the availability of labor and equipment.

And so to the extent that that remains a rate limiter on the growth rate, I think continuing to see that the type of pace we have seen on average in the last few months is probably more realistic. So that would be a slower pace than we saw earlier in the recovery, but this gradual slowly trend up to the right.

Yeah, got it. Thanks for that. And rig providers are starting to talk a little bit more about activating longer idled AC rigs and as they get deeper into their stacks and potentially some more substantive upgrades as that rig count sort of trends up. Can you maybe just talk about what you think could be your potential market share as these newer rigs come back to work? Do you have a sense of...

where PaySun is already installed and what the opportunity might be to participate in any of these new sort of rigs that are going back to work.

I think our share of the people who are talking about reactivating keys would be such that we would expect our share of the new rigs firing up to be about the same as the rigs that we've seen active in the market recently.

So I don't know that I would see a material change in market share up or down from the reactivation of rigs.

Got it. Okay. All right, I'll leave it there. Thanks very much.

Thank you.

Thank you and as a reminder if you have any questions please press star followed by one.

Next question comes from Michael Robertson at National Bank. Please go ahead.

Hey, good morning, John , Celine. Congrats on the solid quarter. Thanks for taking my question.

You had mentioned in your commentary that one of the factors supporting the stronger revenue per industry day was product adoption. I was just wondering if maybe you could wrap some more color around some of the particular products that you're seeing, stronger adoption rates that's driving that and maybe if you could speak to

you know, what kind of ballpark penetration those have in the market right now to understand, you know, how much further that adoption could go.

Sure, there's probably two categories Michael around what that product adoption increase looks like. I would say some of the product adoption increases are what I'll call the re-adoption of some products that may have come off through more challenging environments. One of the things when customers are looking to bring their spending down is they'll look at trying to do as much with a little less equipment and so when things get a little better they tend to take some of those products back. So I'll call that kind of a re-adoption effect.

And that effect has probably largely played out today. So I don't know that there's a significant amount of readoption type of opportunity. Maybe the specific area I'd call out around kind of revenue growth as it relates to newer product types of adoption is really in the data delivery space that we talked about within our drilling data segment. And that's really customers looking to bring the data into their systems through a variety of mechanisms. So I think that...

has more running room than the readoption effect has.

Got it, got it. That's really helpful, caller. Any updates on your free cash flow prioritization here? Assuming we're looking at industry activity levels continuing to climb. Just wondering how you're thinking about where you would put that to work.

I think one of the best places for us to put our capital to work today is in the business. We think there's real opportunities for further investment within our existing business. You know, I mentioned some of the space where customers are increasingly have focus on how do they get that data moving around into the various systems that they're using and I think there's real opportunities for further investment in the business first and foremost.

Then when you start to look at the returns to shareholder questions, I think we have articulated in the past that our desire has to be a bit more flexible in our capital allocation or shareholder returns than we were in the past. So a little bit less focus on the regular dividend which we expect will continue to increase but a more significant use of repurchases than we would have had in the past because it is a more flexible mechanism to scale up and down as other opportunities for investment show up. So, thank you very much.

As free cash flow improves and continues to get a little better, that makes more available for that return to shareholder side as well. And as I said, continued growth in the regular dividend, but also probably a little more use of the repurchase side.

Got it. Helpful color as always. Appreciate you taking my questions. I'll turn it back.

Thanks Michael.

Thank you. If there are no further questions, you may proceed.

Thanks very much for joining our call this morning. If you have any follow-up questions, you're certainly welcome to reach out to Celine or myself, and otherwise we'll look forward to speaking to you after the third quarter results in November .

Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that you please disconnect your lines.

Ion for ailable o ated ING conf? Ing F the call case our 8, our company, our 8, you one the recourted ning conferen operated the time. Would law re one the PED system second courarter 20 20 2, nine call caseed on pro any after the mar question and cess question time AR the number one question a, se AR two Thank you the conent. The conent call prote pro and pro that theprior consent case on systems, the ated the by pcase on system yester just looking information sent formation about the company cuss call con it four looking informationion addition ation caseed systems including le the company found nual formation. Thank you may conferen, Ions Thank ning one attend caseed on 20 Y second quarter conferen join on call by H FA our presentident and call over vie our financial for ments andin second quar prov pectti for indust and case on. Then will Ions our second qucour.arter sults reflect ue ation of improve industry conditition and also reflect our strong competitive position.ing oper verage and allll case on generated ated revenue venty four mion in the second quarter of two thousand 20, 16 9% improvement over quarter of last year. We the revenue caseed st thirty one million just representcent forty 2% of revenue, ificant increase from the 13 million or 20 9% of revenue generated in the second quarter of two thousand and 20. all the company business gment ributated to the strong quarterly resul revenue 16 million for the second quarter. sevent one presentcent improvement from the second quarter of last year and sul the one case provement under ly industry conditions revenue ustry North americ bus with eight hundred one llars in second quarter all down ly from the record in arter of year of eight hundred thirtwent $5 still over the eight hundred llar for the second time in the comptwenty. The mention prev's revenue ustry North will ate no ill tivity coun and we fect the second quarter par to the first quarter. Re leve that second quarter revenue industry hundred $1 representcent percent increase the level in second quarter of two thousand and 20, one for the crease reven improve product adoption. The vorable icing vironment as activ levels continue to co arly activity ve international and mar also improve and revenue generated the international bus wel mill ingin the second quarter fif percent provement from the second quarter of two thousand and 20. also not that the second quarter are international business generated the highest level quarterly revenue two thousand 15 energy erg business in LL energy market generated one point seven million in in the second quarter of two thousand 20, two revenue nine cour percent provement the level teen in the the second quarter of two thousand and 20, one ilar the first quarter reportter revenue ER court revenue generated pro related T revenue for gment will fle with the timing of missioning of the inustry recovered and our look remain it. We will continue to investments and cour certain co in icipation future revenue increases priimarly rerelated qument repaared and people specificant. We continue to be proct on the repair of existing technology, on going ficultteen prored ING Tim on liver capital Quip purchases forurther. We are managing in ation ary fect certain components of our co CT our second arter just thirty one million or courforty 2% of revenue P ic levels and PT levels in the second quarter of twentthousand 19 20, 3%. Last th americ R able the PED on for the three mons and thirty two thousandandtwenty eighteteen point five million or twoy re sent per share significant increase from the five point three million or six sent sha generated in the second quarter of two thousand and 20 case on generated a hundred forty eight million revenue. seventy 2% increase from eighty six million. The court ponding thousandtwo thousand and twent period just the six month three thousand twent thousand 20 two 6, sixty, four point threemillion or courforty three cent revenue compared 20, six million. thirty percent of revenue for the first six mon of 2020 one court able the PED in the first two thousand 20 2, 37 million fortwent five sent per share from nine ION million or wel sent per sha. Compared results continue high. The prove industry conditions, higher levels, revenue generated opering and strong operating ver remain str red positionions to ategic investment. Our cour bus courarter the hundred 8, seven million C, qu and no interest that in T increase ve activity ue to investments in our cour business. We mention courarter that we would be strategic proctti investment inventory levels of components supplyli and commitigate the on going su change alles in the second arter uded two point four million inventory investments and we expected continue with the strate in the coming quarters. Further, the arter of twotwentthousand twent, two caseed on sent six point five million and capital ES rerelated to mainteening in re ressing our technology form resul cash in the second quarter teen point one million, 37% improvement from five point Seven illion generated in the second quter of two thousand and 20. we remain committed re returns and in the quarter return eight point one million shareholders vidence purchases in ct. the second quarter results reflect leading market pres, our strong operating lever pro activ levels and our teen all. We continue to be position competitive financial the Com Thank you. Second quar an results reflected strong peted position and the continue ation of the activity. The indry recover in the thir arter of two thousand and no Ed our con? idated reven just the arter ly to our results. The quarter of two thousand 19 industry activity Y three present lower in the second quarter of two thousand 20, two compared in the ated two thousand 19. we expect ill the V? ments made in iness over the past years. We cour provide the illing tech no G that tomers are creaseing plo ation an? Al to improve operation ments in recent month re be more challengeing sentral ank bring down aing leve inflation by reising interest rates ING void con cession the. The global energy prices, significant ort ES and vated prices in any count.riase the same time itical abity Ed an increase focus and att or source il prices be come more law TR the implication of supply ort law the potent demand dis structionion from low alleng back. We remain conferenid that the America land ill activity will continue to tren lowly and that high in the coming quarters. Glo themand ilar pre pand ic levels and our ING concer potential demand Act cession ary vironment supply fact made over well Act cys prices, the significant over supply markets. The court uation ION ources supply. Our low pre pand ic levels and tending lawer's level cour product our levels eight since the begining ited state release the proct im? Ar from the strategic re demand program court chedual and ate cour. Today the rereport Ed inventory in the strategic re the est levels may nine teen eighty 5, 37 years ago's duction remain 10%. Low pre pand emic levels in VEN ill uncon tedated well something we call ct. the United state crease 20, four conse ut th lowest level in the nine years. The case the CL significant slow over the past month est that the inventory may be a minim level limit supply come from D? Ing down on Ted inventoryes and priared proction slow. The inventory demand will reprior new ill the results expect land illly activity thatad over the coming quarters in energy for expect ING number RO system solation and increaseasing recour ING th revenue criptions con law contin revenue across our business. We will the ary investments position ourselves iz? uture revenue G oper cour will creasees anticipation fur activity G and vailing inflation ation rates. We will inest for continue to market share and pricesing improvements. We continue to end CT three million llars capital expectendag two thousand two 20, two the lo supply change ort inddisrupptions are Act lire chedu will continue to valu cap programs in the conact the? uture opportunities all CT serv operering nowvigated continue to supply change challengealles we suing operortunities mitigate the act the supply change dis ctptions strategic creaseasing inven Quip onents's further anticipated repairs and equipment ills remain strong. Our cap generation continue to improve. We continue to cate capital investments in maintaining our position in our exist? illing related markets, position ourselves future th new and illing markets and rejing capital shareholdters. We remain committated rearding capital re? ers regular courarter vidend remaintaining eight sent per share and pro re rereppurchases remain CUS aring that Ed innovated proctofit and repon company Andwe take questions. Thank you, question comes cap marke ase. Thanks for take questionions. Year may be the start of on thoughts on where th americ coun tren two thousand 2, 20 expect to ad? ual improve a little more of R or point on what expect the market court law year case rights. So think the land market in particular court the V? jority of our activity would prior pand ic in that higher hundred lower nine hundred cour R contin get back question quickly that constr a little by the ailabilityity of AB and qument And so ext that remain ate it th the think continue to that the Ty case reven last mons pro more re list slower PED ly the co? ual low up to thanks that and and provvid ers a little more activ longer, potentionally more sent rates as that coun cour T may be what be potental market share as the reates back to sent Ed Al and and what the opportunity might be two purparticicipvate any of re the cour reactivated be that we would expect our share the be the the G that we teen activ in the market re don't know that ater change of market or down from the reactivation R's 15. Thank you, and questionions ase by one question ES national ase conct courar your call ment the doctor suppcourorting the the strong revenue industry product adoption. Call around some the the particular products strong adoption rates D ING and and maybe two of all par tration the market right to under adoption. Call the two cour around that product adoption increase of the product adoption increases. Call the re adoption of product that off more challenge on one looking to BR ending the look try to a little quipment And so two case products back. Call that re option fect and that pro ly large played out. Don't that the signific re adoption Ty of opportunity specific ary call out around revenue ates CT adoption really the the re bas that ill thesegment and that really looking BR to their systems of. So I think that more runninging than the re adoption ly helpful call any upd on your C prior ization year indust activity vels continue to just one or would to cour cour cap in the business we think real opportunities for further investment with in our existing bus ION custo increase focus ving that. Think opportunities for urther investment in the business cour we to look the returns to rehold that think we our particularulated in the P that our be more fle our capital allocation or return. rehold the P CUS on the, the reregular vid we expect continue increase more signific use recourch that have in the P Flex able other opportunities for investment. So cash low improve and continue to more ailable return rehold and the continue th REG evend but also pro use of pro helpful call has all always question. Thank you, the Ions may Thank for joining our call. The courorting all question come re resu and other will cour a after the courarter results in no Y conase case conference call. We thank you pro IPP ING and.

Please hold for the next available operator. Welcome to CISION. Please hold for the next available operator. Please hold for the next available operator. Please hold for the next available operator. Please hold for the next available operator. Please hold for the next available operator. Thank you so much. One quick minute, I'll just get to connect, okay? I'll just get to it. Please hold for the next available operator. Please hold for the next available operator. Please hold for the next available operator. Please hold for the next available operator. Please hold for the next available operator. Please hold for the next available operator. Please hold for the next available operator. Good morning, my name is Joanna and I will be your conference operator today. At this time, I would like to welcome everyone to the PACEON System Sync 2nd Quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star, then 2. Thank you. The contents of today's call are protected by copyright and may not be reproduced without the prior written consent of PACEON Systems, Inc. Please note that the advisory is located at the end of the press release issued by PACEON Systems yesterday, which describes forward-looking information. Certain information about the company that is discussed on today's call may constitute forward-looking information. Additional information about PACEON Systems, including the risk factors relevant to the company, can be found in its annual information form. Thank you. Ms. Boston, you may begin your conference. Thanks, Joanna. Good morning, everyone, and thank you for attending PACEON's 2022 2nd Quarter Conference Call. I'm joined on today's call by John Faber, our President and CEO . I'll start today's call with an overview of our financial performance in the 2nd Quarter. John will then provide a brief perspective on the outlook for the industry and for PACEON, and then we'll take questions. Our 2nd Quarter results reflect a continuation of improved industry conditions and also reflect our strong competitive positioning of the industry.