Q4 2022 Pason Systems Inc Earnings Call
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Speaker 1: Al for how time RO RO for RO.
Speaker 2: Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the PaySOM Systems, Inc.'s fourth quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. For those of you who are not familiar with the speakers remarks, there will be a question-and-answer session.
Speaker 2: If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, too.
Speaker 2: 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 the advisory is located at the end of the press release issued by Payson Systems yesterday which described forward-looking information. Information about the company that is discussed on today's call.
Speaker 2: may constitute forward-looking information.
Speaker 2: Additional information about pay-son systems, including the risk factors relevant to the company, can be found in its annual information form. Thank you. Selen Boston, CFO , you may begin your conference.
Speaker 3: Thank you, operator.
Speaker 3: Good morning and thank you for attending PASAM's 2022 4th Quarter Conference call.
Speaker 3: I'm joined on today's call by John Faber, our President and CEO .
Speaker 3: I'll start today's call with an overview of our financial performance in the fourth quarter and 2022 fiscal year. John will then provide a brief perspective on the outlook for the industry and for paython and we will then take questions.
Speaker 3: I'm pleased to report on PESON's fourth quarter and full year 2022 results. PESON's 2022 annual financial results represent a significant improvement through 2021.
Speaker 3: Throughout 2022, we saw improved industry conditions, increasing demand for our products and technologies, we were able to defend our strong competitive positioning and demonstrate our high operating leverage.
Speaker 3: In 2022, we generated $335 million in revenue and $160 million of adjusted EBITDA, which represented 48% of revenue.
Speaker 3: These are the highest annual levels achieved by PASON since 2014, which was a record year for PASON.
Speaker 3: These annual levels exceed what was generated for both revenue and adjusted EBITDA in 2018 when North American land drilling activity was 36% higher.
Speaker 3: Net income attributable to pay-thon for the year ended December 31, 2022 with $108 million, a 218% increase from $34 million in 2021.
Speaker 3: Throughout 2022, Paython incurred $34 million of net capital expenditures. These investments reflect the ongoing refresh of our technology platform as customer demand for our data delivery product offering continues to grow.
Speaker 3: fleet maintenance for our field service presence, and also an element of catch-up on the lower levels of capital expenditures that were seen in 2020 and 2021, which were $5 million and $10 million, respectively.
Speaker 3: With the challenges seen within global supply chains during the year, roughly 50% of this capex was incurred in the fourth quarter as these challenges began to ease.
Speaker 3: Recatch flow generated in 2022 was $70 million, up 28% from the $55 million generated in 2021, and of which over 60% was returned to shareholders through a quarterly dividend and share repurchase plan.
Speaker 3: Moving on to the fourth quarter.
Speaker 3: Payson generated consolidated revenue of $94.4 million in the fourth quarter of 2022, a 50% improvement over the fourth quarter of 2021.
Speaker 3: With this revenue paid on posted 48.9 million in adjusted EBITF, which represented 52% of revenue, a significant increase from the 24.2 million or 39% of revenue generated in the fourth quarter of 2021, and a continued demonstration of our mostly fixed cost
Speaker 3: All of the company's business segments contributed to the strong quarterly results.
Speaker 3: Our North American segment set a new quarterly record level for revenue per industry day at $890, beating the previous record of $870 in the third quarter of this year.
Speaker 3: This result benefited from a strengthening US dollar in the quarter, but also represents maintained leading market share and an improved pricing environment.
Speaker 3: Resulting North American revenue was $77.7 million in the fourth quarter, a 54% increase from the fourth quarter of 2021, while segment gross profit increased by 84%. Both of these results once again outpace the improvement in underlying industry conditions.
Speaker 3: Similarly, activity levels and revenue generated per day in our international end markets also improved year over year, and revenue generated by the International Business Unit was $14.4 million in the fourth quarter, a 29% improvement from the fourth quarter of 2021.
Speaker 3: Segment gross profit was $6 million in the fourth quarter of 2022, a 63% increase from the $3.6 million generated in the fourth quarter of 2021.
Speaker 3: Energy Toolbase, our emerging business in the solar and energy storage market, posted a record quarterly revenue results with $2.3 million generated in the fourth quarter of 2022, double the results seen in the fourth quarter of 2021. Fourth quarter revenue for this segment benefited from commissioning of control system projects and improved pricing on its economic modeling software tool.
Speaker 3: It is worth noting that reported quarterly revenue for this segment will fluctuate with the timing of control system installations.
Speaker 3: Sequentially, both revenue and adjusted EBITDA results improved slightly from the 3rd to the 4th quarter of 2022, despite activity levels in North America remaining relatively flat.
Speaker 3: With respect to our cost structure, our fourth quarter results highlight our mostly fixed cost base and our ability to benefit from higher levels of revenue within this context.
Speaker 3: We will continue to see increases in variable elements of our cost structure and will continue to work to manage inflationary effects on our business, which for us is most impactful around the cost of our people.
Speaker 3: 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.
Speaker 3: That said, our fourth quarter of justice but a result of $49 million is the highest level that Pace on Hasteen since the fourth quarter of 2014 when Ray counts for significantly higher.
Speaker 3: Net income attributable to PACEON for the three months ended December 31, 2022 was $36.3 million, or $0.44 per share, a significant increase from the $11.1 million, or $0.14 per share generated in the fourth quarter of 2021. Our balance sheet remains strong and incredibly well positioned to make strategic investments while returning to the table.
Speaker 3: an emerging completions technology business through an $8 million increase in our minority ownership position and a $25 million preferred shared financing agreement of which $10 million was funded in the fourth quarter to accelerate growth capital plans.
Speaker 3: We remain committed to shareholder returns and in the fourth quarter return $15.6 million to shareholders through dividends and share repurchases.
Speaker 3: which reflected our increased dividend level of 48 cents per share annually.
Speaker 3: We ended the quarter with no interest bearing debts and $172 million dollars in total cash.
Speaker 3: In summary, we are very proud of our 2022 results, which continue to reflect our leading market presence, our strong operating leverage through improving activity levels, and our pristine balance sheet.
Speaker 3: I will now turn the call over to John for his comments on our outlook.
Speaker 3: over to John for his comments on our outlook. Thank you, Celine.
Speaker 4: Our fourth quarter financial results again showed strong year-over-year growth compared to the fourth quarter of 2021. North American industry activity grew 34% year-over-year in the quarter and Payson again outperformed the growth in underlying drilling activity with a 50% increase in consolidated revenue. Full year revenue increased by 62% and adjusted even die increased by 120% compared to two years ago.
Speaker 4: highest annual revenue since 2009.
Speaker 4: Energy tool base annual revenue increased by 75% due to the installation of additional energy storage systems and stronger price realization for our economic modeling software tool.
Speaker 4: Meanwhile, we remain focused on maintaining appropriate control over our operating and capital costs, where their most significant cost increases coming in areas that directly impact our service and technology advantages.
Speaker 4: and providing capacity for additional revenue growth.
Speaker 4: The macro environment continues to be challenging. The interest rate hikes implemented by central banks in response to high prevailing levels of inflation have created global recessionary economic conditions.
Speaker 4: Warmer than expected winter weather has resulted in a collapse of Henry Hub gas prices from a high of just over seven dollars in late December 2022 to approximately 250 today.
Speaker 4: While approximately 15% below 5-year averages, total crude and petroleum product inventories have moved upward from their lows in recent weeks.
Speaker 4: We anticipate these factors could lead to some modest near-term declines in drilling activity, particularly in natural gas basins.
Speaker 4: On the other hand, the ongoing development of additional LNG capacity, geopolitical instability, recovering oil demand as China emerges from COVID-19 restrictions, and increased U.S. oil exports through Europe provide support to demand for North American oil and gas production.
Speaker 4: On the supply side, the announced reductions in Russian oil production
Speaker 4: Analyst estimates of tight OPEC spurt production capacity
Speaker 4: And the completion of releases from the U.S. Strategic Petroleum Reserve also stand as potentially bullish indicators for North American land drilling activity.
Speaker 4: Oil prices remain at a level that can generate strong financial returns for our customers and justify continued drilling activity.
Speaker 4: As a result, our medium-term outlook for continued slow, steady growth in North American land drilling activity remains unchanged.
Speaker 4: The ability to increase the land rig count to increase oil supply will be challenged by the tight, high-spec rig market and availability of labour.
Speaker 4: In short, we continue to see downside risk to industry activity being limited by the fundamentals of supply and demand.
Speaker 4: while the growth rate on the upside is constrained by rig and labour availability.
Speaker 4: Beyond some potential for near-term pressure on drilling activity, we expect to generate growth through modest increases in industry activity as well as continued opportunities to realize increases in product adoption and pricing as we deliver additional benefits for our customers.
Speaker 4: We expect capital spending of approximately $45 million in 2023 as we pursue opportunities to renew and extend the capabilities of important parts of our hosting platform.
Speaker 4: This will further solidify our leading position and reinforce our foundation for future product development and continued revenue growth.
Speaker 4: We continue to position ourselves for future revenue growth through investments in the solar and energy storage business through our majority ownership and energy tool base, and in the oil and gas completions market through our non-controlling interest in intelligent wellhead systems.
Speaker 4: In the fourth quarter, we increased our ownership stake in intelligent well-ed systems through the purchase of $7.9 million of outstanding common shares.
Speaker 4: And we announced an agreement to invest an additional $25 million to fund accelerated growth, $10 million of which was funded late in the fourth quarter of 2022.
Speaker 4: The timing of further investments in IWS will be subject to the growth outlook for the business, and we currently anticipate funding additional capital later in the first quarter or early in the second quarter of 2023.
Speaker 4: We remain committed to returning capital to shareholders through our regular quarterly dividend and through share repurchases.
Speaker 4: We returned $43 million to shareholders in 2022 and we are maintaining our quarterly dividend at 12 cents per share.
Speaker 4: The strength of our business allows us to make the required investments to secure our position as the leading provider of the drilling data and technologies.
Speaker 4: to pursue additional sources of revenue outside of the oil and gas drilling market, and to return meaningful capital to shareholders.
Speaker 4: We remain focused on ensuring that Payson is an innovative, profitable and responsible company. We would now be happy to take any questions.
Speaker 2: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch tone phone. You will hear a three tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two.
Speaker 2: If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Keith Mackey with RBC. Please go ahead.
Speaker 5: Hi John , Celine, good morning and thanks for taking my questions.
Speaker 5: Just wanted to start off on the product and price adoption. You mentioned they've been big drivers of growth and revenue for Industry Day in 2022. How do you frame the upside in those metrics from here going through 2023 with a mix of macro factors and...
Speaker 5: Canada, US, and international.
Speaker 4: Good question Keith. I guess I'll even segment the question on product adoption a little bit into kind of existing products and on the new product side.
Speaker 4: So I think if we look and we say on the pricing side first, we think we have opportunities for continued price realization going through 2023. We've delivered a number of things on the product side in the last year that we think will support some of that on the pricing side.
Speaker 4: In the product adoption side, you know, data delivery is something we've talked an awful lot about the last couple of years. I think we'll continue to see adoption on the data delivery side. And a little bit on the new product side, there's a few things that will come in 2023 that I think we'll see some incremental revenue from some of the capex that we're talking about in a 2023 environment. We talked about kind of refreshing renewing.
Speaker 5: That's helpful context, thanks for that. And just to follow up on the North America versus international sort of discussion. Thank you.
Speaker 5: How do you think about your revenue growth in those two jurisdictions through 2023? Do you think international will outpace North America or will some of these factors offset and lead things to look differently than that? I think there's certainly a lot of expectation that international growth will start.
Speaker 4: We expect higher growth rates than the North American market in 2023.
Speaker 4: In terms of the impact on the overall business, the aggregate revenue growth may still be larger from the North American markets just by virtue of the relative size of the international markets versus the North American markets for us.
Speaker 4: So the impact on the overall business, the aggregate revenue growth may still be larger from the North American markets just by virtue of the relative size of the international markets versus the North American markets for us. Okay, that's helpful. Thanks very much.
Speaker 6: Great. Thanks, Keith. Your next question comes from Cole Perira from Stiefel. Please go ahead. Hi. Good morning, everyone. So, assuming we end up in more of a flat activity environment, how should we be thinking about margins? I mean, you touched on pricing a bit.
Speaker 3: ever seen. I think you know when we talk about potential modest declines in rig counts in the U.S. I would say that's more of a short-term view. You know we view that the the modest the slow growth and steady pace of increases will pick up in the second half of the year. So I wouldn't I wouldn't really view any meaningful changes in our fixed cost base in that short term.
Speaker 3: I'd say quarterly margins will fluctuate when you look back at the years where we were generating these level of margins that are record levels for the company. You would see, so for 2014, for example, you do see some quarterly fluctuations kind of in the range between the mid 40s and mid 50% range, depending on the mix of rigs. And then we've also seen some fairly significant swings in foreign exchange in recent quarters.
Speaker 4: level of activity. We've talked about the investments we made and people both on the service side and the technology side. And obviously, this thing starts to flatten a little bit from the growth rates we've seen previously. We'll be bringing on new people at quite the same rate. But you'll have to remember that anybody who's been in an organization for one year versus two years, people who have that second year of experience have quite a bit more functional capacity.
Speaker 4: and you think about the capacity that it takes to train the new person from your existing people. So I would say you're not necessarily going to see the cost increases, but it will have effective capacity increases will still continue to be reasonably significant, I think through 23, both on the service side and the technology side, by virtue of the fact that we have a fuller complement of wonderful people here. Got it, yeah that makes a ton of sense.
Speaker 4: them. Yeah we certainly seen some of the the recount come off right as you sort of indicated and you know it's possible we could see a little bit further declines from where we are currently but I don't think we're going to see significant declines from where we are currently right it's it's more pronounced than the gas side as you know when you see the Henry hub price moving down as it has but there's a couple of offsets there right you know first of all not all operators
Speaker 4: get the Henry Hub price, right? Some people do realize quite a bit higher prices for their gas based on what their end markets are. You may see some movement between rigs that will go from the gas side or become more oil directed to the extent that they can do that within the same operating basis.
Speaker 4: And it's also possible that some people, because you have a fairly tight rig market, some people may continue to drill through a little bit and maybe leave a few more wells uncompleted, but continue the drilling programs to maintain access to those rigs. So, from where we are today, yep.
Speaker 4: likely we could see some modest declines, but we don't think it might be quite as significant as what the market might be expecting.
Speaker 6: Got it. Okay, perfect. That's all for me. Thanks. I'll turn it back. Thanks Paul.
Speaker 2: There are no – ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. There are no further questions at this time. Please proceed.
Speaker 4: Thanks very much and we appreciate the time that you've taken to join us this morning for our update on the fourth quarter and the full year of 2022. We'll look forward to talking again in early May following the release of our first quarter results. And until then if you have questions, you can certainly reach out to Selina and myself at any point and we would be happy to take your calls. Thanks very much and have a terrific day.
Speaker 2: This concludes the conference. Thank you everyone. You may now disconnect.