Q3 2022 Pason Systems Inc Earnings Call

60% improvement over the third quarter of 2021.

With this revenue pace on posted $46 2 million and adjusted EBITDA, which represented 50% of revenue a significant increase from the $22 4 million or 39% of revenue generated in the third quarter of 2021, and a continued demonstration of our mostly fixed cost base.

Sequentially. Our operating results also improved quarterly revenue increased by 26% in the third quarter compared to the second and adjusted EBITDA increased by 49%.

All of the Companys business segments contributed to this strong quarterly result.

Our North American segment set a new record level for revenue per industry day at $871, beating the previous record of 835 in the first quarter of this year.

This result benefited from the strengthening U S dollar in the quarter, but also represents maintained leading market share an improved pricing environment.

Resulting north American revenue was $75 2 million in the third quarter, a 63% increase from the third quarter of 2021, and a result that once again outpaced the improvement in underlying industry conditions.

Similarly activity levels and revenue generated per day, and our international end markets also improved and revenue generated by the international business unit was $15 8 million in the third quarter of 52% improvement from the third quarter of 2021.

Energy tool base, our emerging business in the solar and energy storage market generated $1 4 million in the third quarter of 2022, which represents a 23% improvement from the levels seen in the third quarter of 2021.

Sequentially reported revenue for this segment was down slightly given the timing of commissioning of control system projects. While the segment continues to grow revenue generated from subscriptions for its economic modeling software tool.

We've spoken in previous calls about how we would be making investments and incurring certain costs in anticipation of future revenue increases.

We will continue to see increases in variable elements of our cost structure, but our third quarter gross profit and adjusted EBITDA results reflect our ability to absorb higher levels of revenue within our primarily fixed cost base.

We will continue to be proactive on the repair of our existing fleet and technology and we will work to manage inflationary effects on certain components of our cost structure, which for US is most impactful around the cost of our people.

These effects along with changes in foreign exchange and the relative mix of rigs within our end markets could have an impact on quarterly margins in the coming quarters.

That said, our third quarter adjusted EBITDA result of $46 $2 million is the highest level that peso has seen since the fourth quarter of 2014, when rig counts were significantly higher adjust.

Adjusted EBITDA margin of 50% in the third quarter also mirrors levels seen in the 2014 peak activity periods.

Net income attributable to pace on for the three months ended September 32022 was $34 3 million or <unk> 42 per share a significant increase from the $13 1 million or <unk> 16 per share generated in the third quarter of 2021.

Year to date pace on generated $240 6 million of revenue at 67% increase from $144 million in the corresponding 2021 period.

Adjusted EBITDA for the nine months ended September 32022 was $110 6 million or 46% of revenue compared to $48 3 million or 34% of revenue for the first nine months of 2021.

Accordingly, net income attributable to pace on in the first nine months of 2022 was $71 4 million or <unk> 87 per share up from $22 7 million or 27 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.

We ended the quarter with $206 million in cash and cash equivalents and no interest bearing debt, it's worth noting that our cash balance at September 30 reflects the strengthening U S. Dollar is seen at the end of the quarter.

We mentioned last quarter, we will 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 third quarter that included $3 million and inventory investments and we expect to continue with this strategy in the coming quarters.

In the third quarter of 2022 pace on spent $6 9 million in capital expenditures, resulting.

The resulting free cash flow in the third quarter was $24 million up 48% improvement from $16 three generated in the third quarter of 2021.

We remain committed to shareholder returns and in the third quarter returned $11 $7 million to shareholders through dividends and share repurchases.

In summary, we are very proud of our 2022 results to date, which reflect our leading market presence our strong operating leverage through improving activity levels in our pristine balance sheet.

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 third quarter financial results reflect our strong competitive position with continued steady growth in industry activity.

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

Our quarterly revenue and adjusted EBITDA were at their highest level in more than seven years, Despite land rig counts, which remains below pre 2020 levels.

Maintaining our leading market share, while driving higher product adoption and better price realization allowed us to generate the highest revenue per industry date in the company's history.

Meanwhile, we remain focused on maintaining appropriate control over our operating and capital costs, keeping our spending at appropriate levels within the current context, while ensuring our ability to generate continued profitability and growth in the future.

The macro environment continues to become more challenging as central banks move more aggressively to control inflation through interest rate hikes.

The World is faced with geopolitical instability recessionary economic conditions, and a global energy crisis with significant shortages and elevated prices in many countries that is bringing a heightened concern as colder winter weather approaches in the northern hemisphere.

Despite having retreated closer to <unk>.

85 U S dollars per barrel <unk> oil prices remain at a level that can generate strong financial returns for our customers and justify continued drilling activity.

Despite growing concerns of economic recession global demand for oil remains above pre pandemic levels.

While demand may weaken as recessionary conditions persist supply factors may overwhelm those demand impacts.

U S storage levels of crude oil and petroleum products, including the strategic Petroleum reserve now sit at levels not seen since 2005.

While the U S government has announced it will extend its releases from the strategic Petroleum reserve into December it is.

Also telegraphed its intentions around purchases to replenish the reserve.

As releases from the reserves come to an end markets will need to come into balance through lower demand increased production, where a combination of the two otherwise commercial crude inventories will decline.

The inventory of drilled but uncompleted wells has been drawn down for 27 consecutive months and appears to have plateaued near its minimum sustainable level.

As a result to grow production or even to maintain it at its current level, which remains approximately 8% behind pre pandemic levels additional drilling will be required.

We expect steady growth in land drilling activity in the coming quarters, albeit at a slower pace of growth then witnessed over the past two years.

The ability to increase the land rig count to increase oil supply will be challenged by the tightening of the high spec rig market and availability of labor.

The largest U S land drillers have communicated that they are currently sold out of high spec rigs and while they will look to refurbish and upgrade additional rigs. This is unlikely to drive meaningful growth in the available rig fleet over the next year.

In short, we see the downside risk to industry activity being limited by the fundamentals of supply and demand and the growth rate on the upside being constrained by rig availability.

Within that context, we expect to generate growth through increased industry activity as well as continued opportunities to realize increases in pricing our product adoption and pricing as we deliver additional benefits for our customers.

In order to deliver those benefits, we will continue to make the necessary investments in our operating costs, including increased investments in technology development and.

And working capital and capital expenditures to secure our leading competitive position.

We continue to expect to spend approximately $30 million in capital expenditures in 2022.

Given that we have spent $18 million in the first three quarters. This implies meaningfully higher capital expenditures in the fourth quarter.

I would highlight that while supply chain conditions are beginning to show signs of improvement delivery timelines remain difficult to estimate in many cases and as such some capital expenditures could be delayed.

Looking ahead to 2023, we expect to increase our capital spending to $45 million to pursue opportunities to renew and extend the capabilities of important parts of our hosting platform.

This will further solidify our leading position and reinforce our foundation for future product development and continued revenue growth.

While this level of capital expenditures was higher than we have incurred since 2015 as a rental business. We have benefited from the redeployment of idled assets through industry downturns.

Further the supply chain challenges witnessed over the past two years have resulted in delays in maintenance capital spending on operational equipment such as trucks.

We currently expect capital spending to be maintained at approximately $45 million per year for the next couple of years before beginning to trend lower.

Our capital intensity remains lower than the company's historical annual capital expenditures.

We continue to position ourselves for future revenue growth through investments in the solar and energy storage business through our majority ownership in energy tool base.

And in the oil and completion gas completions market through our minority investment in intelligent wellhead systems.

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

We remain committed to returning capital to shareholders through our regular quarterly dividend and through share repurchases.

When we took the extraordinary measure of significantly reducing our dividend in the third quarter of 2020, we communicated our intention to establish a more flexible approach to capital allocation.

This included establishing the regular dividend at a lower percentage of free cash flow than prior to the pandemic and an increased use of share repurchases to return capital to shareholders.

We continue to favor flexibility in our capital allocation.

As we consider the impressive free cash flow generation capabilities of our business, we are able to meaningfully increase the fixed amount of returns to shareholders through the regular dividend, while preserving our ability to adjust total shareholder returns over time through share repurchases.

As a result, we are increasing our regular quarterly dividend from <unk> <unk> per share to <unk> 12 per share.

At our current share count the pro forma aggregate annual dividends of $39 2 million compares to free cash flow of $98 million over the trailing 12 month period.

While the board will continue to regularly consider the appropriate level of regular dividend payments. Following this increase we expect potential future increases to the regular dividend to be more modest over time.

In the third quarter, we also returned $5 $1 million to shareholders through share repurchases.

The strength of our business allows us to make the required investments to secure our position as a leading provider of drilling data and technologies.

And to return meaningful capital to shareholders.

We remain focused on ensuring that <unk> is an innovative profitable and responsible company and.

And we would now be happy to take any questions.

Thank you Sir.

Ladies and gentlemen, we will now begin the question and answer session.

I would like to ask a question. Please press star followed by the number one on your telephone keypad and if you would like to withdraw your question. Please press star followed by the number too.

One moment. Please for your first question.

Your first question will come from Michael Robertson of National Bank. Please go ahead.

Hey, good morning, Celine and John Congrats on another great quarter and thanks for taking my questions.

I believe you have to go back pretty far in time to find a better quarter for your international segment.

Maybe a two part question here. So part one has that growth been largely ubiquitous across regions or are there some.

Geographical standouts.

So the biggest part of our international business is in South America, and specifically in Argentina. So while I would say that we are seeing strength kind of across the board immuno oil markets.

Both are uniquely in Argentina, we've probably seen some improvements on the pricing side and has also been some help from the mix of rigs between drilling and Workover rigs.

Got it got it.

I guess as a follow up to that you noted the improved product adoption.

Part of the driver behind that growth.

Are there any offerings that are really starting to gain traction in some of those markets, but in terms of.

Market penetration you still think you have a lot of runway just just trying to hone in on the growth potential moving forward.

Both near and longer term.

So Michael I'm, interpreting that question to be a little bit to the international market.

Okay, but I think the answer would be yes.

When we talk about that mix of drilling rigs and workover rigs as we start to move towards more drilling rigs that would drive the adoption of some of the we'll call. It somewhat more sophisticated if you will products and as well as some of the data delivery technologies that we talk about quite a bit.

And do you feel thats still sort of in early days at present.

So I think theres still probably some significant running room for those windows that mix continues to evolve yes.

Got it.

Switching gears it might be one for saline.

Cash balance exiting the quarter back over $200 million.

Based on surplus.

Free cash flow generation likely climbing further in the fourth.

I appreciate the flexibility that.

That provides through the ebbs and flows of the cycle with respect to being able to maintain a dividend our continuous investment in R&D, but I was wondering if the significant changes in the current macro environment be it.

Inflation or the rise in interest rates impacts your strategy or thinking in terms of how you go about investing it may.

Maybe the weighting between short term money market securities versus low risk investments with a longer duration.

Yeah. Good question, Mike and I would say much like borrowers are likely spending a bunch of time right now trying to be super strategic about reducing borrow borrowing costs were spending probably as much time thinking about how to generate the best returns on our cash deposits.

To your point I think balancing flexibility around the ability to act on and pursue strategic investments in our core business.

Especially with kind of some difficulties around when we talk about capex programs that we talk about the difficulty in predicting timing on actual deliveries, we want to make sure we maintain that flexibility in our cash balance and being able to actually execute on opportunities.

But also maximizing free cash flow generation, which we're now in a position with the cash balance that we have to be able to actually earn interest income on that for the first time in a long time. So we're still continuing to evaluate opportunities on how best to approach that.

Do you think you would maybe shift shift waiting too.

Longer term investments trying to be opportunistic and lock in higher rates for a longer period of time or.

Like how do you feel about that it's.

It's not off the table.

But I would say flexibility still continues to remain important.

Got it got it okay.

Helpful color I appreciate you taking my questions Congrats on another solid quarter and I'll turn it back thanks.

Thanks, Michael.

Ladies and gentlemen, once again, if you would like to ask a question. Please press star one at this time.

Yeah.

Mr. Faber there are no further questions Sir.

Terrific. Thanks, so much for taking the time to join US for our quarterly conference call. This morning, we continue to appreciate the support and interest.

You have in based on if you have any further questions certainly don't hesitate to reach out to us leaner myself at your convenience we'd be happy to take your calls have a great day.

Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and you may now disconnect your lines.

Yes.