Expro Group Holdings N.V. Q1 2023 Earnings Call
His points, reflecting a non repeat of the extraordinary costs that were recognized in the first quarter, a better business mix and improved operating leverage.
Our view remains that the fundamental backdrop for energy services is quite constructive with long cycle development and capacity expansion projects supporting a growth phase that will be multiyear in duration spanned all phases of oil and gas development and include all operating environments.
On balance the long term demand outlook is favorable for the.
<unk> term U S. Economic outlook is uncertain post lockdown increases in demand led by China should result in an overall demand recovery in the second half of 2023, OPEC plus appears committed to supporting oil prices non OPEC supply growth has been constrained to date and global inventories are below average I'll note that building U S. GAAP.
Gas inventories are the exception here with additional LNG export capacity likely the medium term solution.
Turning to the energy services sector, while the consensus view seems to be that growth for the U S. Onshore market has reached a plateau.
We see momentum continuing to build in the international and offshore markets that Expo is most active in.
We entered 2023 with a healthy order book and I am pleased that we have continued to build on its momentum in the first quarter, we captured more than $350 million and additional work by leveraging global relationships and the breadth of our portfolio of capabilities and by capitalizing on a strong resurgence of activity.
Over the next several years the offshore market is expected to attract investment capital and amounts not seen in over a decade, largely because of the limited investment in upstream oil and gas during the last five plus years and an expected increase in oil demand to pre pandemic levels.
With increasing urgency operators are looking to replace produced reserves and add capacity to meet projected demand growth as large scale developments that are planned across multiple basins progress, particularly in Latin America, those projects will likely drawdown available global capacity within the energy services and equipment industry. We.
This dynamic will create pricing tailwind as 2023 unfolds and the calendar turns to 2024.
We also expect a constructive commodity prices and energy security considerations will continue to incentivize new exploration and appraisal campaigns, particularly offshore West Africa and in the eastern Mediterranean.
Increased D&A should contribute to a favorable supply demand dynamic for value added energy service providers, such as <unk> and provide our company with further scope for net pricing gains.
Perhaps most importantly, a resurgence in EAA should extend the current offshore growth cycle.
We continue to demonstrate our capabilities on frontier field developments for example in West Africa, Our services and solutions are helping operators more fully participate in the significant and growing global market for liquefied natural gas or LNG.
As previously disclosed Eni awarded <unk>, a 10 year fast track production solutions contract for an onshore pretreatment facility in the Congo that is designed to increase LNG capacity in part to address European demand for low carbon electricity generation.
We were pleased to win this important project and our team is working to deliver the cost effective innovative solutions that our client has come to expect from <unk>.
Extra also has a long history of teaming up with service partners with a combination of complementary capabilities operating footprint and relationships can result in better outcomes for our clients and.
In this spirit, we recently entered a strategic alliance with one of the large service companies to supply our leading subsea technologies on a global basis and to work collaboratively for new subsea completion decommissioning and intervention work scopes by supplying in riser open water and surface applications.
We are delighted to have secured the first commitment under this new arrangement with the award of a $40 million contract for the sale of subsea equipment for our multi well development in Angola. We believe this alliance provides an excellent platform for our organizations to work together and leverage the respective strengths of industry leaders for the benefit of our combined customer base.
Yeah.
In the first quarter. We also completed the acquisition of submitting specialists Delta global generate significant market interest in innovative technologies that this acquisition brings to extra.
<unk> experienced leadership team has an excellent track record of developing and deploying cementing technologies for the offshore market with operations across the UK and Norway.
Our intent is to increase the penetration of Delta <unk> business into the Gulf of Mexico, West Africa, and Asia Pacific markets by combining <unk> global operating footprint and award winning cement head technologies with Delta tax range of open water cementing solutions to increase.
Once operational efficiency, delivering rig time and cost savings and to improve the quality of cementing operations.
Express distributed fiber optic sensing product line with short listed by a major client in the UK for their global Innovation Award this.
The recognition of performance delivered on our calls in project in the UK, whereby <unk> was able to provide the first ever production profile data and high rate gas well and is being positioned to be rolled out as a standard solution for their well stock as you may recall, our DFAST enabled data acquisition and data interpretation capabilities.
Our expanded with a 2022 acquisition of solar.
We highlighted several other operational achievements technology awards and regional highlights in our press release and in the slide presentation that was posted today at <unk> Dot com.
As I have done on previous calls I will call to attention to a few noteworthy achievements in the quarter to give new participants a better sense of extra services and all participants are sensitive business momentum within the sector added expert.
Our well construction product line continues to reinforce its position as the premium provider of tubular running services with a leading position in complex wells good exposure to deepwater and ultra deepwater development and an advanced position in key growth markets. While construction like drilling is more leveled to early cycle activity.
These which should better position EXPAREL for large offshore development projects that are starting to ramp up around the world.
As the backlog of offshore deepwater and ultra deepwater projects continues to build clients will look to secure high in Trs and subsea landing strained capacity going forward and we believe that extra remains our first call.
Combination of market structure capacity constraints and differentiated technology should provide these product lines in particular with scope for improved pricing.
Moving on to some regional commentary within well construction I want to commend, our Brazilian tubular running services team and congratulate them for achieving nine years without lost time incident.
The Brazil team also retained a multibillion dollar wireline intervention contract for a key client. This is a three year award for provision of offshore slick client services that represents most of our Brazil, the wireline operations.
We also secured an 18 month contract for provision of tubular running services on the <unk> field offshore Brazil. This was largely due to expert technical offering and our reputation for service delivery.
From a technology standpoint in Brazil, we successfully deployed our award winning Centrify consolidated control console for a major customer, which is a new technology deployment at and an important part of our broader digital strategy.
Centrify as a safety in automation technology that provides hands off control for a single operator on multiple tools with tableau interface that allows operator mobility and provides real time visibility of equipment status to drillers and their supervisors.
Also within North and Latin America region, we want a subsea well access contract extension for a further 24 months on our major clients mature assets in the Gulf of Mexico surface quality was a key driver in securing the extension.
As <unk> has been this client's subsea large bore provider on these assets in the Gulf of Mexico since 2006.
Additionally, in the Gulf of Mexico, our well construction team successfully completed two long term wealth suspensions for Supermajors utilizing both our non and five eights and 14 inch Packers, which were suspended for approximately six months and the well. This is an important accomplishment for our route well isolation system.
Our fluids analysis team is also working with a customer in Colombia to carry out the first sampling in Colombia, a clean hydrogen.
Our participation in the hydrogen market is in its early stages, but this is a market with significant potential to further develop.
Moving to Europe , and sub Sahara Africa region extra subsea well access team was recently awarded plug and abandonment work in the UK sector of the North Sea, winning a 12 months scope for an upcoming nine well project extra developed a bespoke equipment package for this work to meet specific requirements for this customer.
Extra also completed a multi well campaign for a customer in the Turkish sector of the Black Sea. During the first quarter. This high rate gas cleanup and measuring system with flow rates in excess of 100 million standard cubic feet of gas per day included David the desk services for remote monitoring and data quality control.
In addition to the rig services extra provided the reservoir engineering analysis, providing data interpretation services.
This integrated service contract also included well intervention services as well as Trs well test and data gathering services extra services were delivered without loss time incident and with zero NPT on this nine well project.
Our UK based well construction team was also awarded multiple contracts during the March quarter, including Trs support for multiple mobile offshore drilling units are what are called my views and platforms in the north sea and west of Shetland.
The contract includes drilling completions and abandonment work scopes and importantly, we will be delivering equipment to eliminate personnel in the red zone and to improve drilling efficiency.
While construction also captured a new three year Trs contract for work in offshore Denmark from a long term incumbent.
Finally, we are pleased to have extended a multi services contract with a key client in the U K demonstrating the breadth of our portfolio and the value of extra technologies. This.
This is a three year extension to an existing wireline services contract with well test in Trs services now formally added to the contract and extra is now preferred supplier for these services.
Adding technologies, such as Cfos are coil hose might well circulation system and our okta potent annual intervention system are also included.
Moving to sub Sahara Africa expert, providing heidrick mediation services for a major international client in Mauritania, utilizing our coil hose technology as compared to coiled tubing are coil host solution delivered cost savings with a reduced equipment footprint, while retaining a fast response capability and delivering operational safety.
Yes.
Also in Mauritania, we have secured a contract for the provision of well test and Trs services for a five well rig based subsea plug and abandonment project.
It's also noteworthy that our team and taught karate, Ghana celebrated 14 years with zero recordable safety incidents.
<unk> is currently servicing a longstanding clients gone a value maximization plan, which is a multiyear multi well campaign led by our well intervention and integrity product line. This major client also recently commended expro for our strong commitment to rig safety culture, and our one team approach and we congratulate the entire team for their dedication.
<unk> to delivering the highest levels of safety and quality.
And the media, we delivered a wireless reservoir monitoring solution to a major client. This technology will enable the customer to efficiently gather the reservoir information that's required to optimize development plans for this exciting new frontier project.
We're also awarded a new contract for subsea large bore electro hydraulic services for two upcoming wells and offshore Congo. This work is scheduled to commence in the summer of 2023.
As a final highlight of activity in the eastern region in Tanzania, We successfully completed our first slick Eli and operations in sub Sahara Africa. This four well appropriate and campaign will utilize expertise proprietary trigger system that combines with the efficiency of slick line and our control provided by real time monitoring.
Historically <unk> has maintained a very strong position in the West African markets and we are encouraged by the resurgence in activity in the uptick in exploration and appraisal activity with vast resources and good access to demand markets security of supply concerns are serving as a new catalyst for operator investment in Africa.
In the Middle East and North Africa, we secured a 20 month Trs contract with a key client in the United Arab Emirates. This multi million dollar contract is a great example of sales professionals working in collaboration with the client to meet their needs and develop valuable business and we're delighted to further enhance our relationship with this important customer.
<unk>.
Additional trs activity in the UAE has also provided us with an opportunity to introduce new technologies, including our new Triple catwalk. This fatality. This facilitates the manipulation of triple stands of drill pipe and doubles of casing from the pipe rack to the rig floor, thereby delivering improved drilling efficiencies.
In Saudi we are pleased to have been awarded a long term contract covering well test activity for drilling and Workover rigs in Iraq, we have secured a five year contract for clamp on meters for a major client covering single and multi phased clamp on sooner meters for surveillance.
And in Egypt, we were awarded a two year contract extensions for well testing drill stem testing and Trs services.
Capacity expansion projects in the Middle East will attract significant investment over the next decade, and we remain focused on building. Upon exports currently strong position in markets, such as Saudi UAE, Egypt, and Algeria. In addition to providing traditional services such as Trs well test in wireline, we are well positioned in the middle.
East to provide early production production optimization and emissions management solutions in support of ongoing capacity expansions and carbon reduction initiatives.
Finally in the Asia Pacific region.
This is a subsea projects that I mentioned earlier also in Australia, we were awarded a contract to provide our rig deployed intervention riser system utilizing express direct hydraulic controls. So a decent pension of an initial 10 development wells followed by a further planned 18 wells the contract duration is 22 months.
For the same client in Australia. We have also secured an award to provide well testing services for a two well exploration campaign.
In Brunei, we were awarded a two year extension for well test subsea DST TCP and fluid services.
And in Malaysia, we were awarded a new contract to provide subsea landing strings, and a well test package for a deepwater exploration well. This is a great example of coordination across product lines to deliver value to the clients and win new business.
Our Malaysian client recently presented extra with its Triple Star Safety performance Award highlighting the performance of our Trs team and their commitment to safety and service quality.
While Xtra was initially not part of an integrated services award our business development team worked with the client to determine a discrete services proposal.
The subsea services lines that I referenced earlier. This is an excellent example of professionalism collaboration and coordination with other service partners to deliver value to our clients.
Additionally, Malaysia, our Trs team was successful in winning a contract for provision of Trs services for a three year Trs and conductor installation contract.
And finally.
Indonesia, we secured a well test contract for an additional well after a successful earlier campaign.
Turning to sustainability, we are proud to have published extra 2022 sustainability review at the end of March.
This comprehensive publication showcases the progress we continue to make in our journey to embed, our environmental social and governance strategies into everything that we do both within our business and then the communities in which we operate.
This is our second annual ESG report and we believe it is an excellent reflection of our cross company efforts to progress our own carbon reduction capabilities and support our customers in achieving their goals as well you can review the full report at extra Dot com.
Our geothermal business continues to develop globally, we're working to advance new strategic partnerships as we target for example, the European geothermal heating market as noted in our press release, we recently completed the integration of express facilities and den Helder, providing operational efficiencies across product lines just world class.
This facility will not only support our Netherlands operations, but also our expansion into the geothermal business across Europe .
We also continued to advance our strategy to grow our business and the carbon capture usage and storage sector further strengthening our portfolio advancement organization to manage the evolving industry needs around carbon capture and more broadly to support de carbonization initiatives within the energy industry.
Before I turn the call over to Quinn I'd like to provide some perspective on trends we are observing in the marketplace.
Market outlook for 2023 continues to improve building on liquids consumption growth in 2022 with demand likely to surpass pre pandemic levels in the second half of the year driven by steady recovery in the Middle East, China, and India and growth in domestic aviation and global transportation fuel demand.
Global liquids production is anticipated to increase slightly in 2023 with supply increases from non OPEC countries expected to be offset by continued OPEC plus where strength that is consistent with the output cuts that were announced in October of 2022 and reaffirmed again here in April 2023.
As noted earlier, our sense is that OPEC leadership in the middle East is committed to managing supply and supporting oil prices until global economic activity reaches a post pandemic equilibrium sometime in the second half of 2023.
Our customer dialogue indicates no retreat from the ambitious capacity additions and spending plans that have been announced.
As a result liquid supply and demand should remain in relative balance over the medium term supporting high and generally stable oil prices.
System with EIA average Brent forecast of roughly $85 per barrel for 2023, and our longer term outlook that has oil prices remaining at a profitable level for operators.
Roughly 80% of new offshore projects to be sanctioned have a breakeven price below $40 per barrel. According to a recent analysis that was conducted by rice debt at.
As deepwater barrels are also considered to be carbon advantaged relative to other energy alternatives. We believe there are fundamental drivers that underpin a strong multi year offshore market outlook.
Natural gas prices appear to be stabilizing down substantially from demand destructive levels seen at the beginning of Russia's ongoing war with Ukraine.
Following the invasion energy policy in the U S and Europe began to pivot in 2022, and consequently momentum has shifted from phasing out natural gas to reducing emissions from natural gas, while potentially cleaner alternatives are developed and deployed.
We share the view that has been expressed by several wall Street analysts that are pragmatic path toward global net zero will likely rely on gas as a transition fuel and potentially as a structural source of low carbon electricity generation.
While we expect IOC capital investment to remain discipline overall upstream investment is forecasted to exceed pre COVID-19 levels. This year as operators look to increase production in part to replace Russian barrels and governments focus on energy security and renewed economic development with macroeconomic pressures beginning to ease in the second half.
Of the year the outlook remains positive for the energy services sector, and we believe demand for our services and solutions will continue to grow throughout 2023 and into 2024.
Activity is continuing to rise as operators are striving to increase production from existing assets and develop new fields offshore and deepwater, especially.
Motivated by sustainable development considerations operators are also prioritizing gas and LNG projects.
As a result offshore rig activity has continued to increase especially in Latin America and across our Europe Sub Saharan Africa, Middle East and Asia Pacific regions as operators look to progress new developments in places such as Guyana, Norway, Angola, and Egypt, and increased exploration and such as in <unk>.
This is like Namibia.
Expected increases in deepwater and ultra deepwater activity should favor, our well construction and subsea well access businesses at elements of our wealth management business, which combined represent about 65% of extra business.
The energy Trilemma energy security energy transition and supply diversification is increasingly underpinning policy investments.
As I noted earlier this is driving increased activity in gas and LNG production across north in sub Saharan Africa, North America, and the Middle East.
We continue to see further demand for our production related technologies in these areas traditionally a core strength of <unk> building upon recent high value contract awards.
Operators are looking to make the most out of their existing oil and gas fields and prior investments capitalizing on the sustained strong commodity pricing to reduce well productivity decline extend asset life and reduce the amount of methane emissions from their overall fossil fuel operations.
Consequently, we are seeing increasing demand for our well intervention and integrity and elements of our wealth management product lines in support of these brownfield enhancement programs, especially across the Asia Pacific and Latin American regions. These services collectively represent about 35% of our business.
With increased activity and demand our company in the broader energy services sector are experiencing increased utilization of people and assets and a tightening of supply which is supporting ongoing initiatives to raise prices and extract more value for our services and solutions couple.
Coupled with sustained increases in operators upstream expenditures and a resulting increase in activity the outlook for the sector and extra is resoundingly positive with that I'll hand, the call over to Glenn to discuss our financial results.
Mike.
To recap first quarter revenue was $339 million.
Which was up by $59 million or 21% year over year.
The increase in revenue was driven by higher activity, primarily an MLA and Isa <unk>.
Sequentially revenue was down by $12 million or approximately 3% relative to the fourth quarter of 2022.
Largely reflecting historic seasonal patterns.
First quarter contribution margin, which is essentially cash basis gross profit was 34% with startup delays on our rides list well intervention system, resulting in unrecoverable and unanticipated costs.
As Mike noted the vessel deployed lwr system became operational late in the first quarter of 2023, and we expect that <unk> related headwinds experienced in the first quarter will be nonrecurring.
Or at least not material to go forward consolidated results.
Excluding mobilization startup and commissioning costs contribution margin for the first quarter of 2023 fourth quarter of 2022, and the first quarter of 2022 was 37% 40%.
37%, respectively with the sequential trend as adjusted primarily reflecting activity mix.
First quarter support costs at $76 million totaled 22% of group revenue.
Support costs were up approximately $5 million, both sequentially and relative to the first quarter of 2022, primarily reflecting higher labor costs.
Support costs as a percentage of revenue were up approximately two percentage points relative to the fourth quarter of 2022 and were down approximately three percentage points relative to the first quarter of 2022.
At 22% of revenue support costs are down approximately nine percentage points relative to the combined support costs of Expo in Franks in Q4, 2020, which was the last full quarter prior to the announcement of the merger.
Adjusted EBITDA for Q1, 2023 was approximately $42 million.
Representing a $5 million or 14% increase year over year, and a sequential decrease of approximately $28 million or 40% relative to the December quarter.
Adjusted EBITDA margin in Q1, 2023 was 12% as compared to 13% in Q1, 2022 and 20% in Q4 2022.
Like contribution margin the sequential decrease in adjusted EBITDA is primarily attributable to $11 million of lwr related mobilization startup and commissioning costs in APAC.
The remaining sequential decrease in adjusted EBITDA and adjusted EBITDA margin, primarily reflects lower revenue and a less favorable activity mix, which was most pronounced in the Isa and Mena regions.
Seasonally lower activity revenue and contribution margin also resulted in reduced operating leverage as highlighted by the sequential increase in support costs as a percentage of revenue.
In addition, our Q1 equity and earnings of unconsolidated affiliates reflects sequentially lower JV earnings.
In Europe higher margin services activity, such as well test was down sequentially, which again is consistent with historical seasonal patterns.
To large extent the Q1 reduction in European activity was replaced with production solutions revenue that was generated in sub Saharan Africa, albeit at a lower average margin.
Mena results, primarily reflect equipment moving between contracts, particularly in Algeria.
And associated loss revenue and mobilization costs. We also had equipment sales and Isa and Mena in Q4 2022 that were not repeated in Q1 2023.
Excluding $11 million of lwr related mobilization startup and commissioning costs Q1, adjusted EBITDA for the group would have been $53 million and adjusted EBITDA margin would have been 16%.
Without lwr related costs, adjusted EBITDA and adjusted EBITDA margin in Q4 2022 in Q1, 2022 would have been $75 million and $39 million, respectively, and 21% and 14% respectively.
Also adjusted for <unk> related costs Q1, adjusted EBITDA was up about 35% year over year.
Adjusted net income for the first quarter of 2023 was flat compared to the first quarter of 2022.
It was down compared to the fourth quarter. Adjusted net income was <unk> 22 per diluted share primarily reflecting lower adjusted EBITDA.
Results for the first quarter of 2023, the fourth quarter of 2022, and the first quarter of 2022 include foreign exchange gains of <unk>.
<unk> and <unk> <unk> per diluted share respectively.
Q1, adjusted operating cash flow, reflecting cash provided by operations before cash paid for interest severance and other expenses and merger and integration expenses was $27 million compared to $1 million in Q1, 2022 and $99 million in Q4 2020.
Two.
The sequential trend in adjusted cash flow from operations, largely reflects lower revenue and adjusted EBITDA and the non repeat of a reduction in working capital in Q4.
Capital expenditures for the first quarter of 2023 totaled $29 million compared to $11 million in Q1, 2022 and $31 million in Q4 2022.
Capex for the full year 2023 should fall within a range of $120 million to $130 million.
Regarding the Delta Tech acquisition total consideration was estimated at approximately $17 5 million $8 million of which was paid at close net of cash acquired or approximately $1 million.
The balance of consideration represents the net present value of our estimate for future consideration that is tied to performance.
Most of the fair value of net assets acquired will be allocated to acquired intangible assets and goodwill.
At March 31 balance sheet also includes a couple of million dollars and Delta tech related deferred tax liability.
In addition in the first quarter, we acquired $10 million in extra shares at an average price per share of $17 99.
Total liquidity at quarter end was approximately $316 million cash.
Cash and cash equivalents, including restricted cash was $186 million as of March 31.
Total liquidity also includes $130 million is.
<unk> to the company for drawdowns as loans under our revolving credit facility.
The approximate $93 million balance of the facility is available for bonds and guarantees.
Approximately half of which is currently being utilized.
Xtra had no interest bearing debt at quarter end and the company has no interest bearing debt today.
As Mike noted, we maintain our prior full year 2023 guidance range for revenue of between $1 45 billion and $1 $55 billion.
For adjusted EBITDA of between $275 million and $325 million and for adjusted EBITDA margin of between 19 and 21% of revenue.
In fact, our current internal forecast for full year 2023 is modestly more bullish than the forecast that we havent hand, when we provide our initial guidance for the year on our Q4 2022 earnings conference call in late February .
Our full year expectation for support costs as a percentage of revenue and cash taxes as a percentage of revenue.
As plus or minus 20% and plus or minus 3% respectively.
As discussed on previous calls anticipated growth in annual incentives typically results in a seasonal build in working capital in Q1 with.
With cash flow tending to improve in the second half of the year.
In fact, the working capital build in Q1, 2023 was relatively modest which contributed to positive free cash flow in Q1.
We expect that activity and revenue will trend higher in working capital to moderate in 2023 progresses.
As a result, we continue to expect to be cash generative for the full year.
Our internal target for 2023 free cash flow margin or free cash flow as a percentage of revenue is mid to high single digits.
I will now turn the call back over to Mike for a few closing comments.
Thanks Quinn.
I would like to reinforce a few points from this call and leave you with three key points.
Number one expert continues to deliver double digit revenue growth by capturing market share and entering new markets. This is a result of us being able to leverage our global operating footprint and breadth of capabilities.
Number two we continued to deliver world class service and introduce new technologies <unk>.
These technologies are the result of organic and inorganic investments, which we believe will positively impact our results in 2023.
And third after the startup and commissioning challenges associated with launching our new business extra continues to deliver exceptional performance. We also continued to add attractive businesses to our order book.
With a favorable outlook for offshore and international activity increased scale and improving business mix, we should be well positioned to expand margins increased free cash flow and deliver value to all stakeholders.
With that I will transfer back to the operator for our Q&A session.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad.
If you would like to withdraw your question. Please press star followed by <unk>.
When preparing to ask your question. Please ensure your devices unreachable luxury.
First question today comes from Andy Kim with Barclays. Your line is open.
Adding.
Hi, Good morning, just wanted to touch on you.
$11 million in unanticipated call this quarter.
Was there something unique about the <unk> projects and results.
On the call just trying to understand how much of a risk it could be a similar type of project.
Mike can we have in the pipeline.
Sure no Eddie Thanks, Thanks for thanks for participating thanks for the question fundamentally what it really amounts to is we had anticipated that we would go operational much earlier in the quarter. We really didn't go operational with the system until about the last week of March the real positive thing is we've been fully opera.
<unk> since the last week of March.
And we actually as of now just a few minutes ago has completed the third day suspension well so the real challenge for Us is.
Took longer on some of our third party suppliers and some of our partners to be able to go out and go operational we had some weather delays in the first quarter.
Cyclone season in that part of the World at times, So that really was what it amounted to as it was we Didnt go operational as as soon as we had anticipated but I.
The real key takeaway is we are now fully fully operational we've completed a third well we still have additional wells that will continue to move on to so.
That's how I would look at that.
Anything I missed.
Obviously.
We've had a couple of different couple of quarters in a row now that we've had costs associated with the system.
But the important thing that we accomplished in the first quarter as we're now on ticket with the customer and we're executing the work that we were contracted to do.
Obviously incremental costs are realized before being revenue generative and that we're not kind of flex with other projects all of which ultimately tie back to what Mike was talking about which was the delay in the startup.
And I think one other point that I didn't I did mentioned I think it's worthwhile, adding is this was not a this was a new technology development for <unk>, we kind of repurpose some of our subsea expertise. The challenge here has not been related specifically to our technology development or the engineering developments it really was around.
The availability of the vessel timing of the vessel being fully operational weather windows supply vessels. It was those kind of.
Obviously important to be able to go out and conduct an operation you have to have all of those things lined up but it was not an engineering or a technology gap that we had in there.
Okay got it thank you for that color.
My follow up is on the Delta acquisition.
That company currently operates in the UK and Norway, you highlighted plans to globalize that business.
The regions like the Gulf of Mexico, West Africa can you just talk about the expansion opportunity here is the plan to offer an integrated offering where.
Could you also be doing the segmenting work on all the wells that youll be doing the Trs Tom.
Good morning.
Specialty cementing service.
Applicable.
Okay.
Yeah, Great question. So it really is it's applicable in particularly in deepwater and ultra deepwater operations.
We would anticipate that we will it will be an additive service to ourselves we're already going to have folks on the rig handling Trs Marty already doing some of the spending operations. So this really is an incremental additional segmentation service.
We see great application to build a move it outside of the New Canada, Norway in Norway I was in South America recently in Guyana in particular.
Tremendous tremendous interest from customers there to be able to apply the technology.
But it's.
It's a really novel technology that becomes particularly important for operators as you start to see rig rates that start to move to the $500000 $600000 day rate. What this really allows you to do is and improves the efficiency of cement Asian operations.
So you can save 12 to 24 hours of rig time.
Either not waiting on cement to set or more importantly, not drill out a much longer case.
<unk> Thats, what the technology really brings too and that's why it's a great thing for us when we see rig rates increase because that means that there's going to be even more of an interest from operators in this technology because it reduces the amount of rig time.
Okay understood. Thank you.
Last one if I could squeeze one in here.
The 20 months Trs contracting secured in the UAE.
If you can provide some more color on this is this for offshore work or the onshore work on the artificial islands there.
Excuse me.
Yes.
<unk> seen some clients due 2027.
Just the first step and additional extensions to this contract.
Yes, it really is the first step and additional extension to the contract gives us the ability for both offshore and land operations.
And what we really were trying to highlight and I realize we give a lot of we have a lot of commentary and a lot of examples of contract awards and those kind of things what I really want for everybody to take away from that is I think it's $350 million of contract awards in the quarter.
Hope everybody takes away from that as you see that in all of our geographies across our product lines.
There's a lot of stickiness to that so one of the concerns right now obviously as you know any volatility in any one given market and what I hope you take away from our commentary is $350 million is very material, it's across our product line, it's across services across customers across geographies. So it gives us that that's one.
Of the things I think it's really positive about about Expro is we've got a good global footprint offshore.
Offshore international and we have a kind of a broad offering.
Great. Thank you for all that color I'll turn it back.
Great. Thanks, Ed.
Our next question comes from Luke Lemoine from Piper Sandler Your line is open.
Hey, Luke.
Hey, good morning, Mike Good morning, Glenn.
Good morning, Sir 23, EBITDA guidance unchanged.
'twenty three guidance unchanged for EBITDA, and I guess with <unk>.
Plus an even healthier second half than the street is expecting and Quinn you alluded to your internal forecast more bullish.
When you provided the EBITDA guide on the points you call for 'twenty three can.
Can you talk about the visibility that you have a second half whats improving more than you expected.
And then maybe what it takes to get to the midpoint or above of that EBITDA.
EBITDA guidance.
Your confidence and visibility surrounding this.
Yes, I guess, where I would start is.
As the year plays out as we see it.
First and foremost we'll be regressing to mean in terms of.
Regional performance.
And the.
Seasonal issues in most predominantly in Isa.
Quite frankly, the Aesop performance was better sequentially than you would've seen historically setting aside pandemic years, that's largely as a result of higher margin services activity in the UK and Norway and being replaced by African activity, which as I mentioned in my prepared remarks was at lower margin.
So first off we see sudden mena.
Really over the second and third quarter kind of moving back to historical margin performance.
Obviously with the North sea picking up in the warmer weather.
<unk> largely a story of non repeat of unusual costs that we've talked a lot about over the last couple of quarters.
MLA.
We had a seasonally.
Weaker quarter, but not dramatically. So you know and I think what youll see in the.
Certainly in the second half of the year and to lesser extent in the second quarter is MLA margins moving back up to what we saw in the second half of last year.
So I guess were.
So I would guide as we are.
Slides highlighted and expectation for the second quarter.
Consistent year over year performance of the first quarter, which is plus 20% revenue growth, which would imply sequentially, 10% up we gave a guide of 16% to 18% EBITDA margin in the second quarter for the <unk>.
Or I should say in the slides.
And obviously, if you do the math that would imply in the.
Last three quarters of the year to get to the midpoint of our guidance youre comfortably over $380 million of revenue per.
Per quarter, and if you kind of bake in the 10% sequential growth in the second quarter that implies the year over $390 million of revenue per quarter in the second half of the year.
The margin expansion as Mike highlighted is a combination of non repeat of losses.
Replay dial Wi.
Number two is improving business mix and three is an improvement in operating leverage as you move up in revenue.
And at least historic fall through margins. So it's a lot of different things that should be moving in the right direction and again.
Our room.
Napkin math.
But to get to 20% EBITDA margin based on the guidance we have in the quarter. The reported you should be comfortably over 22% EBITDA margins in the second half of the year and that's our expectation.
Yeah, Okay, yeah, thanks for the walk through there.
On your comment just kind of be more bullish anywhere on your <unk> call.
Any kind of geographies or product lines that really stick out there.
I mean I guess.
With the Trs in subsea.
Traditional subsidy or subsea completions business.
We are seeing a step up in bidding activity, we've had awards at.
At more attractive pricing than what we've executed work out over the last number of quarters, although it's going to take some time to work its way into the financial statements, but it is good to see that we're getting awards at higher pricing.
And it's really just a question of when the work starts up.
See it flow through the financial statements, but.
While construction has been on a very strong run we expect strength to strength in that business line.
La probably most significantly impacted by that.
In subsea as the year progresses, and we should start to see.
Incremental activity and margin improvement, particularly with <unk>.
Just hopefully behind us at this point.
So I guess look the only thing I would add is.
Yes.
We highlighted.
Everett.
EAA type projects, we continue to see kind of a pickup in resurgence in DNA type projects from our customers.
And why is that important it's important because historically in legacy expro.
Almost 20% of our revenue was derived from Eni type activity today, we're kind of down in the single digit 67% and that's not because we lost market share thats fundamentally because customers were not moving forward with exploration activity now we're starting to see a pickup in that that gives me more of a sense of what the next steps.
For operators, because you need to have those those projects that you've been able to explore on to be able to move them into more of a development phase.
And then secondarily, it's really the positivity, we continue to see around West Africa.
Just from a customer engagement technical enquiries.
Market pricing checks those kind of things we continue to see some more.
More and more interest in West Africa, and I think that bodes well for us for this would be more of a longer term recovery in West Africa in particular.
Okay, Great and then just one more real quick Mike.
Cory Gilbert as highlighted.
$50 million in kind of a warrants bookings this quarter can you talk about how significant that is I think this first quarter you guys had kind of given a number like that just kind of wondering how much roughly comparison.
Normal standards for how significant this is for you.
I think what I would say is.
The legacy Frank's and legacy X pro organizations had a slightly different approach to budgeting.
We've got the two.
Obviously entirety organization on the same.
Budget process at this point.
So when we track quarter backlog internally.
Combined company basis, we are at the highest levels, we've been at and that reflects.
It's kind of a book to Bill.
Dynamic, which is we're adding more work than what we're executing in the quarter.
So I think you're right, we haven't provided an order backlog or work in the past, but it is moving in a positive trend.
Great. Thanks, Luc great I appreciate it.
Our next question comes from Amit <unk> from Goldman Sachs. Your line is open.
Hi, good morning.
<unk> cost for the quarter, our mobilization costs, typically not recoverable or possible to the customer.
Can you remind us on the duration of this particular engagement how should we think about that piece going forward.
Yes, so I mean.
Good question. This is this particular contract is it's more of a number of wells to be completed.
Number of the suspensions to be completed so it depends on the.
Average amount of time for that this is a contract that will last us certainly over the next quarter, plus probably probably more like two quarters.
They do have the ability to add in some incremental services.
Around <unk>.
<unk> type activities and and.
And while not well diagnostics and those kind of things.
So typically you would have.
Once your operational with the with the <unk> system.
And then the costs are going to be recoverable, we were in a pre commissioning phase.
Hence the reason why the.
The system was not was not operational so why that kind of milestone for us to go operational at the end of March was was pretty.
It was very important for us to be able to have the system on ticket so to speak.
Got it until through basically is that if you do have mobilization from one region to another now from here out on you should be able to recover it back more maybe some cost.
Correct, we would be we would be in a moat demo type type casting scenario of absolutely.
Which could be.
They'll go to or.
Or.
Day rate.
Got it understood that's helpful.
And then how should we think about the levers for free cash flow. The range you provided between mid to high digit margins I think for the full year or any thoughts you can provide around bag and capital allocation priorities.
Yes. Thanks.
The.
Short version of it is as you know, we expect working capital, which we had a relatively significant build throughout 'twenty two it started to reverse in the fourth quarter.
Essentially a push on working capital in the first quarter of 2023.
So it is really.
Higher revenue fall through and as a result EBITDA.
You start.
Basically going from EBITDA to free cash flow.
Three things working capital cash taxes, and Capex and I think we have relatively good visibility.
Capex.
And taxes working capital.
Times is a bit of.
Unknown.
Where we sit today, our expectations is that working capital will moderate.
And a decent percentage of EBITDA will fall through to free cash flow.
Of course, it's dependent upon costs capital discipline, and I think we've got a reasonable track record there.
Got it and anything on the capital allocation I think you said about 8% of GAAP revenue would be capex stock.
Can you remind us of what that processes.
You did a buyback this year.
Quarter, what's the cadence that we should expect.
And so we have a $50 million authorization on the buyback we've utilized now.
About half of it.
So we will continue the.
Dialogue with our board regarding the return of capital plan and what form it takes but we've previously put targets out there.
About a third of our free cash flow, we expect to return to shareholders in the form of dividends buybacks or some combination thereof.
Sure.
That's our current expectation obviously, it's easier to think about returning capital when you can demonstrate cash generation.
Okay.
Our hope and expectation is that Youll see cash generation in the second half of the year in particular and I think that's when you would more likely see us.
And moving forward with.
Capital plans.
But it's always going to be have explanation of it organic and inorganic investments.
Great. Thanks, Alex.
Our next question comes from Steve <unk> from Sidoti Your line is open.
Good morning, Mike Good morning, I appreciate all the detail on the call.
Just wanted to ask I think you highlighted labor cost pressure and how it's impacting support costs I'm just trying to think about.
Strong margin guidance, providing for the second half of what we can back into any concerns about labor cost pressures in labor availability given that not just you, but plenty of others are seeing increased work second half and into next year.
Yes, I think it's.
But first of all we have gone a couple of years as an industry without.
Real.
Compensation adjustments, so I think thats, what youre starting to see across the board as the labor market has tightened up and activity is approved.
We did put through.
Cola type adjustments across the board at the beginning of 'twenty three.
Particularly in the U S. You have a kind of a social security dynamic the front end loads labor cost to some extent, but more than anything going from 20% to 22% of revenue and support costs as a reflection of the seasonal drop in revenue and as that reverses.
Support costs, we believe moderate and ultimately kind of fall within that 20% range.
Gave in my prepared remarks so.
Yes, Steve the only thing I would add is that's one of the that's one of the advantages that technology brings to US one of the things I highlighted was the was the centrify rollout in Brazil.
Centrify really allows us to have less personnel on the rig.
You rely more on the technology than you do on manpower. So it allows us to expand our operations without adding additional people, which is tremendously advantaged advantageous to us and the other aspect is new technology Rollouts like Delta attack.
We rolled that out in a country like Guyana, we already have guys. We already have personnel on the rig.
We're in the process of cross training the existing personnel to be able to go out and execute more operations with a delta Tech type services.
So we can get more revenue throughput so to speak without incremental people.
I think the other thing that distinguishes alright, maybe answering other companies in the sector.
I'm, sorry, Steve suggested levels okay.
All right.
I was just going to say I also wanted to ask about synergies I know you.
Go ahead sorry.
I was just going to say extra.
Extra like a couple of other companies in the sector.
We won't name names, but our <unk> operation is largely staff with G&A as people same in Algeria.
Lots of other places that we operate so we are not exposed to a single labor market.
Which does have some mitigating influence on our labor inflation trends.
That makes sense makes sense I.
I just want to follow up on synergies I know you are basically at your three year target at the end of the year when Youre thinking about that margin second half are you thinking youre going to squeeze any more synergies zone.
Yes, I think its when we werent at our three year target in the first year we were through.
Our first year target and I think directionally, we're at 115% to 120% of the original $55 million target that we put out there. So there is a.
A bit more to do.
And if nothing else I think incremental synergies capture which is largely a business process, driven and technology, including it.
Projects that are still progressing.
I think that will serve to mitigate labor and other cost inflation.
But the 20% support cost guidance includes our.
Our expectations in terms of remaining synergies capture.
Perfect Great. Thanks, Mike Thanks, Glenn.
Thank you Dave.
Our final question comes from Andrew patients with T. Rowe price your line is open.
Hey, Thanks for sorry profit on the call and thanks for taking my question.
Just I was just curious if you could just talk about how the.
<unk> technology is performing and.
As the customer generally pretty happy with kind of the performance.
I guess I was just going to the view that that this was kind of a longer term opportunity in Australia, but it kind of sounds like you guys are already moving it out to do plug and abandonment work. So maybe you can just kind of address the performance.
Technology.
Sure so we.
We have a number of projects.
Opportunities in Asia Pacific overall.
Australia in particular will be one in which I think I've made the comment maybe you in the past that I suspect. This particular <unk> system may not ever leave Australia, just because of the demand and the opportunities. There. We do we do provide other.
Provide other intervention services with our in riser type system Thats more rig based.
No.
That may be where there's a little bit of confusion, what I will tell you is that the efficiency of the system.
As you know.
We've completed the third well now I think it took us about six days to complete the <unk> suspension. The original project plan had us take about seven days so even on the on the third well, we're we're gaining some efficiency here.
Customer feedback has been very very positive about our ability to go out and now that we've gone operational one as I said earlier, we've been 40 plus days to be operational so technology wise the system is performing.
Exceptionally well it really frankly was the teething pains of making sure that the vessel was available making sure. The vessel was ready to go it's not been the the subsea or the intervention kit that's been that we've had.
Teasing pains on so to speak but I think more importantly, it's really around the opportunity for light well intervention services.
To go out and do intervention.
Rig based it's much more efficient.
It's fewer days to rig up it's fewer days over well center, just more efficient operations and that's why customers are so, particularly keen to see this.
<unk> successful and frankly why this particular operator has been has shown a tremendous amount of patients because they know what the benefit of it is where we can go out and do vessel based interventions. So.
That's a real positive for us to have gotten those first three wells done.
And we will have we've got additional projects number of additional projects lined up right behind this one.
So is the.
And I'm not looking for like exact numbers, but just because it is the system overall I expect it to be EBITDA positive here going forward or did.
Did you kind of give the.
Sort of initial customer kind of a sweetheart deal to kind of.
Prove out the technology like is it.
Should it be profitable kind of in the back half of the year.
But certainly youll see improved margin as a result of a non repeat of extraordinary cost.
But I think it's fair to say that the initial jobs are essentially resume building in nature.
And as Mike said in his prepared comments over time, we will demonstrate the breadth of capabilities of the system and our services and ultimately received better value for what we provide.
But that's going to take a couple of quarters to happen.
Andy.
Yes, Scott.
Good perceptive question no part of this is when we originally engage with the customer on this project.
Rig rates were in the 300000 and $400000 range and not that there's a direct linkage between.
Rig rates and vessel rates on intervention or certainly a pretty good proxy.
As we move forward with incremental projects. After we have an established track record of operations.
And <unk> seen rig rates start to move from the 300000 to $500000 range, we're going to have the ability to start to move pricing on the vessel as well so.
Having that initial track record was doing a shake down crews getting these things done so to speak and be able to show the operational excellence that we're known for that just gives us it puts us in a much better position to be able to move prices down the road.
Great. Thank you so much I appreciate it.
Okay. Thank you thanks Ana.
We have no further questions. So this concludes our Q&A on today's conference call.
Thank you for your participation you may now disconnect your lines.
[music].
Yes.
Okay.
Okay.