Q3 2023 Pason Systems Inc Earnings Call
Okay.
Good morning, My name is <unk> and I will be your conference operator today at this time I would like to welcome everyone to the Beach and systems, Inc. Third quarter 2020 earnings call.
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Please note. The advisor is located at the end of the press release issued by PCR systems yesterday, which describe forward looking information.
Certain information about the company that is discussed on today's call may constitute forward looking information.
Additional information about beef and systems, including the risk factors to Bell a bunch of the company can be found in its annual information form.
Thank you Janine Boston CFO you may begin your conference.
Thank you Eddie.
Good morning, everyone and thank you for attending pays on 2023 third quarter conference call I'm.
I'm joined on today's call by Jon Faber, our president and CEO.
I'll start today's call with an overview of our financial performance in the third quarter. John will then provide a brief perspective on the outlook for the industry and for pace on and we will then take some questions.
I'm pleased to report on pace on third quarter, 2023 results, which highlight the company's ability to deliver on strong financial performance. Despite a modest decline in activity levels.
Caisson generated consolidated revenue of $93 1 million in the third quarter of 2023, which was slightly ahead of the $92 5 million generated in the third quarter of 2022.
With this revenue PE fund generated $42 3 million and adjusted EBITDA, which represented 45, 4% of revenue.
All of the Companys business segments contributed to this quarterly result, compared.
Compared to the third quarter of 2020 to our North American business unit saw a 14% decrease in industry drilling activity.
The business units generated revenue per industry day of $975 in the third quarter of this year, a new quarterly record and a 12% increase from the same quarter of 2022.
This result continues to highlight the company's strong competitive position the growing demand for our products and technologies and a more favorable pricing environment than seen in the third quarter of the prior year.
Resulting north American revenue was $72 2 million in the third quarter only a 4% decrease from the third quarter of 2022, despite the 14% reduction in industry activity.
Gross profit for the business unit was $42 9 million in the third quarter of 2023% to 12% reduction from the $49 million generated in 2022 and reflects higher levels of depreciation and amortization with the increased investments. The company has been making in capital expenditures in recent quarters cash.
Cash operating costs titled rental services and local administration for the business unit only increased by 2% year over year, highlighting the business units, mostly fixed cost base.
Similarly revenue generated per day, and our international end markets also improved year over year reported revenue for our international business unit was $15 3 million in the third quarter of 2023 down slightly from $15 8 million in the comparative 2022 period.
Excluding the impact of Hyperinflationary accounting for the company's Argentinean subsidiary in each respective period revenue would have increased by 14% year over year.
Reported segment gross profit was $7 3 million in the third quarter of 2023 for the business unit slightly down from the $7 8 million generated in the third quarter of 2022.
Energy to a base continues to grow its presence in the solar and energy storage industry and posted a record quarterly result of $5 6 million, which represents a 293% increase from Q3 of 2020 to the.
The segment has had increased control system sales in the quarter, which will fluctuate with timing of deliveries on future projects.
Sequentially U S rig counts declined throughout the third quarter with the recovery in Canadian rig counts coming out of spring breakup, mostly offsetting these declines, resulting north American industry activity was flat sequentially, while revenue per industry day increased by 7%.
This improvement in revenue per day, coupled with the record results from energy tool base resulted in consolidated revenue, increasing by 10% quarter over quarter and adjusted EBITDA, followed suit and increased 12 by 12% from Q2 to Q3.
Our third quarter results continue to highlight our mostly fixed cost base, which is currently in place to support higher levels of activity seen in the third quarter of 2023, we will continue to manage our fixed cost structure towards our expectation of upcoming upcoming activity levels and will work to manage inflationary effects on our business.
These effects along with changes in foreign exchange sales contribution from energy tool base and the relative mix of rigs within our end markets could have an impact on quarterly margins in the coming quarters.
Net income attributable to pay for them for three months ended September 30th 2023 was $27 7 million or <unk> 35 per share a 19% increase from the $34 2 million or <unk> 42 per share generated in the third quarter of 2022.
The decline year over year reflects the lower level lower industry activity levels, along with higher levels of depreciation and amortization expense on increased capital expenditures in recent quarters, along with higher stock based compensation expense, which reflects the mark to market on the company's cash settled stock based compensation plans.
Year to date based on generated $276 million in revenue, a 15% increase from $246 million in the corresponding 2022 period. This compares to underlying North American land drilling activity that was essentially flat on average year over year.
Adjusted EBITDA for the nine months ended September 32023 was $132 6 million or 48% of revenue compared to $110 6 million or 46% of revenue for the first nine months of 2022.
Accordingly, net income attributable to pace on in the first nine months of 2023 was $89 million or $1 10 per share up from $71 4 million or <unk> 87 per share.
A comparison of year to date results reflects the companys operating leverage with higher levels of revenue generated per operating day improved industry conditions in the first quarter of 2023 and the effects of the strengthening U S. Dollar.
Our balance sheet remains strong and incredibly well positioned to make strategic investments, while returning meaningful cash flow to shareholders.
Based on generated $31 7 million in cash flow from operations in the third quarter, a slight increase from the third quarter of 2022.
In the third quarter based on spend $6 7 million in net capital expenditures in support of our core business, representing the ongoing refresh of our technology platform and the maintenance of our fleet.
Also in the third quarter, we approved and funded $5 million of the 10 million that was remaining under the Companys preferred share financing agreement with intelligent wellhead systems and approved the funding of the final $5 million subsequent to quarter end.
We remain committed to shareholder returns and in the third quarter returned $15 6 million to shareholders through dividends and share repurchases. We ended the quarter with no interest bearing debt and $178 4 million in total cash.
I will now turn the call over to John for his comments on our outlook.
Thank you Celine.
Our third quarter results again demonstrated our ability to generate financial and operational results that outpaced underlying drilling industry activity.
Our revenue increased 1% from the prior year, while North American land drilling activity was down 14% over the same period.
We maintained our leading market position and our North American revenue per industry day increased 12% year over year to $975 for the quarter driven by higher levels of product adoption and improved price realization.
Our international business unit had a solid quarter as well while reported revenue decreased 3% from the prior year revenue was up 14% before considering the effects of Hyperinflationary accounting related to our operations in Argentina.
Energy tool based posted its highest quarterly revenue on record at $5 $6 million driven by the installation of additional energy storage control systems and growth in revenue from our economic modeling software tool. We've continued to see strong growth in our pipeline of control system opportunities, but the timing of booking and deliveries can fluctuate.
Flea between quarters.
We are making the necessary investments in operating and capital costs to strengthen our capabilities in areas that directly impact our service and technology advantages and provide capacity for additional revenue growth.
We continue to expect that we will see a return to steady growth in north American industry activity.
<unk> recently reported North American land rig counts show signs of plateauing around current levels and we expect rig counts will begin to increase later this year and into 2024.
Ultimately the economic forces of supply and demand to establish the prevailing direction of industry activity.
Global oil demand remains strong while storage and the inventory of drilled but uncompleted wells remain at or near multi year lows.
Any efforts to increase supply will require additional drilling activity and as such our outlook for continued growth in land drilling remains positive.
Based on sits at the center of the drilling data ecosystem on the majority of rigs in the Western Hemisphere.
As customers use more automation and analytics technologies data requirements are increasing.
We are ensuring that we have the capabilities to manage additional sources of data higher volumes throughput and speeds of data and additional data transmission and storage protocols.
We continue to expect capital spending of approximately $45 million in 2023, as we renew and extend the capabilities of important parts of our hosting platform and we currently anticipate that our 2024 spending will be at a similar level.
As always we will evaluate our capital program with a focus on increasing revenue generating free cash flow and creating value for shareholders over time, rather than simply in response to prevailing near term industry conditions.
We continue to make investments in growth related opportunities outside of our core drilling related business.
The growth trajectory of intelligent wellhead systems has been impressive.
During the third quarter, we funded an additional $5 million as part of our previously announced preferred share financing arrangement with AWS and the final $5 million tranche will be deployed in the fourth quarter.
Energy tool base is also showing positive momentum as demand for energy storage is growing as government policies incentivize the deployment of additional energy storage assets.
We remain committed to returning capital to shareholders through our regular quarterly dividend and through share repurchases.
We returned $51 $9 million to shareholders in the first three quarters of 2023 through a combination of regular dividends and share repurchases and we are maintaining our quarterly dividend of <unk> 12 per share.
Our balance sheet remains strong with cash and short term investments of $178 million and no debt.
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 to pursue additional sources of revenue and to return meaningful capital to shareholders.
Our demonstrated ability to generate revenue growth that outpaces the growth in underlying industry activity and our high operating leverage will allow us to deliver strong financial results as rig counts begin to increase.
And the momentum within both energy tool base and intelligent wellhead systems gives us further confidence in even greater growth in the future.
And we would be happy now to take any questions that you might have.
Thank you and ladies and gentlemen, we will now begin the question and answer session.
I'd like to ask a question can be presses star, although they didn't buy one on your telephone keypad.
If you would like to do because of all your question. Please press the star followed by the number Q1 moment. Please for your first question.
Your first question comes from the line of Aaron Macneil from TD Colin Your line is open.
Hey, good morning, and thanks for taking my questions. Good morning, everyone.
John on AWS.
The continued investments subsequent to quarter end and.
Your reference to growth in the prepared remarks is noted, but I guess I'm wondering if you can provide a bit of an operations update.
There like what is the company working on have there been any recent commercial successes and what sort of projects or initiatives or your investments funding today.
Yeah. So there's only so much you can say unintelligent wellhead systems, Aaron's because it's a private company, but I think I can probably provide some some commentary to give you a sense of our confidence in that business and why we've probably accelerated our investment of capital a little bit ahead of our initial expectations of that business is growing really well and has over the last number of quarters.
So the pace at which we're putting in capital is related to the pace of growth that we're seeing in the the revenue opportunity is facing that company and so we want to make sure that we're well positioned to to get in front of those opportunities. The business. Today is active in every U S. Basins. So that's a that would be a positive operational indicator that I think I'd be prepared to share.
Not much more in terms of you know number of jobs in various areas, but the other thing that we've sort of talked about it I think in the past as well.
If you look at AWS today that business generates a day rate that is about three times the order of what pace on generates on a daily basis and the completions market is approximately a third of the drilling market. If you look at historical relationships between drilling rigs and completions frac spreads and so if you have three times a day.
Right today with a fairly new.
New business in a market that's about a third time the size, we see a market opportunity that it would be roughly the same size as what pace on faces in the drilling market and so we wanted to ensure that we're well positioned to pursue that opportunity and so that's really what's driving.
The the quantum and the pace of investment, we're making in the <unk> business.
It makes sense I.
I guess, one follow up there.
And I guess this relates more to your.
Capital allocation in the company itself.
How does your investment.
WNS compete for capital with your organic growth opportunities in the core business and energy tool base.
Yeah sure. So as we think about the AWS opportunity, we sort of think about the allocation of capital two ways right. One is the acceleration of the business so call that capital into the business and then we've also been deploying capital to increase our ownership in the business over time right. So if you look at the historical investments we've made some would've been new money.
To the business and some would have been purchased.
Purchases of shares from other existing shareholders. So we do have the opportunity to acquire the remainder of that business. There is a pre established mechanism to do that we could do that comfortably within the cash balance that we have today, but we are certainly preserving cash for the opportunity both to consider that opportunity as well as to continue to accelerate its growth.
Fair enough I'll turn it over thanks.
Okay. Thanks, Eric.
Thank you. Your next question comes from the line of Keith Keith Mckey from RBC. Your line is open.
Hi, Jonathan Lee and good morning.
Good morning.
First wanted to start out just John on your comments regarding the the likelihood for increases in rig counts in North America through 2024.
I appreciate your comments on the oil supply demand storage macro and we certainly are I would say are in a similar camp, but can you just talk a little bit about what youre seeing in terms of.
Your business and how it's how it's setting up for incremental demand are you seeing an increased or accelerating level of of inquiries as new rigs that are needed to go back to work or or what or what is it in your business that you would say.
Is helping underpin that confidence in the in next year's outlook.
Yeah sure. Thanks, Keith I think the short answer of course is that we do have pretty good visibility on the shorter term right. I think if you wanted a longer term view you'd probably need to talk to the drillers themselves and looked at the Capex programs announced by some of the E&P companies, but we sort of see the near term in terms of what our technicians are installing on or our uninstalling right and so that gives us some.
As you have confidence around the plateauing and starting to move up to the move upward from where we are today.
I guess the other thing that made me think about is it simply the question around it probably went a little lower than we might have anticipated. If we if we were honest about where we saw things a few quarters ago and it was probably a couple of drivers there Keith I think one is there's been a difference between what we're seeing in the behavior of the private companies versus the public companies right now that may or may not be related to interest rates and how <unk>.
Fund themselves, but we do see a difference there between private and public. So I guess the other thing is as you look at consolidation in the industry.
Certainly wouldn't be abnormal to both see companies that may be targets.
Essentially kind of put themselves into a state of kind of status quo. While we go through that process and also on the back end of some consolidation, it's not abnormal to see the pro forma rig count between the two companies go down a little bit in the short term as they re prioritize inventory at high grade there their prospects.
Yeah got it makes sense.
Just talk a little bit about the competitive environment for Pacer and you certainly had a very strong market share in U S and Canada.
The last several years and and you mentioned pricing stronger year over year, which isn't true for a lot of different service lines out. There can you just talk about the competitive dynamics, leading to that and where you ultimately see see pricing go from here and I know adoption is a key part of that conversation as well. So maybe if you could kind of weave.
<unk>, all that and it would be great.
Yeah sure I guess, what we would say it helps us from a competitive position as you think about I think you've touched on the prospects for both the pricing side and the product adoption side. It's really the fact that the companies are trying to do more with with data right, particularly around automation and analytics and so when you're trying to do more with data theres, probably at least two things you care.
What about one is the quality of the data and that that makes a lot of different things, but broadly call. It data quality and then the other side is what I'll call more of the consistency of the data. So if we're trying to put in place programs across multiple rigs multiple fleets multiple regions to.
So the greater extent that that data kind of looks the same it's easier to employ these automation and analytics technologies. So that's really been to our benefit given we've sort of had the leading position in the data space and drilling for a very long time.
Yes.
Okay. Thanks for that.
Thats It for me I'll leave it there.
Thanks Keith.
Thank you and ladies and gentlemen should you have a question. Please press the star followed by the number one on your telephone keypad.
Your next question comes from the line of Paul <unk> from Stifel. Your line is open.
Hi morning, all so assume that were going towards a steadier ramp in the rig count than we would have seen a year or two ago.
I mean should we assume it's a fairly limited incremental opex burden and your revenue per industry data is stronger so.
It really that are out of the question I think that your margins could be stronger than they would've been last year at the same activity level.
Thank you.
Yeah, I think from a modeling perspective call. We don't we don't expect any significant changes to our fixed cost base for the expected levels of activity that we see in the short to medium term because you know there is some variable costs associated with our solar and energy storage segments like we found in the third quarter, but outside of that our costs. Our cash operating costs has hardly changed since the third.
Of last year and since that time rig count like we saw in the first quarter of this year were close to 200 rigs higher in North America, and so we can certainly absorb higher levels of activity within our existing fixed cost base to today I think if you think about margins going forward. We think about Q2 Q2, and Q3 levels of this year being sustainable until we see some of that growth in U S.
Rig counts and then clearly we're capable of generating higher margins once that growth begins without significant library operating leverage in our business.
Yeah.
Got it and then just some interesting political developments in Latin America lately.
Can you just talk about the outlook and how you kind of think about that business near term.
Yeah, I guess call, we wouldn't want to be considered experts on geopolitical situations.
Guess, what I would say is that there's certainly certain functions.
Actions in certain prospective governments that would be more favorable to our oil and gas development than others.
That business today.
To the extent that there are some that want to sort of moderate the pace or slow the pace or even decrease the amount of oil and gas investment of course that would be sort of a net negative to us, but we have also seen a trend. The other way that people are trying to do more with more advanced technologies on the technology side. So our view is that there is growth opportunities down there, but its theres, probably as both headwinds and <unk>.
<unk> and I would not be the expert to say, which of those will be greater at any given point in time.
Got it okay. That's all for me thanks, Okay.
Okay. Thanks, Paul.
And there are no further questions at this time I would like to turn it back to John fever for closing remarks.
Thanks, So much Louie we appreciate people taking time to join us for the call. This morning as always if you have more questions don't hesitate to reach out to our saline and myself and otherwise we will look forward to talking to you after the fourth quarter and full year results in late February.
Thank you presenters and ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.