Q3 2024 Pason Systems Inc Earnings Call
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Speaker Change: Additional information about Pace and Systems, including the risk factors relevant to the company, can be found in its annual information form. Thank you.
Andrew: Good morning, my name is Andrew and I'll be your conference operator for today. At this time, I'd like to welcome everyone to the Payson Systems Inc. 3rd Quarter 2024 Earnings Call.
Andrew: All lines have been placed on mute to prevent any background noise.
Andrew: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key.
CFO. You may begin your conference.
Thanks, Andrew.
Speaker Change: Good morning, and thank you for attending Payson's 2024 third quarter conference call. I'm joined on today's call by John Faber, our President and CEO.
Speaker Change: 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 Payson, and we will then take questions.
Speaker Change: I'm pleased to report on Paysan's third quarter 2024 results, which demonstrate our strong competitive position and continued ability to outperform industry drilling activity.
Speaker Change: As a reminder to listeners, Payphone acquired and began consolidating Intelligent Wellhead Systems, or IWS, on January 1st of this year, creating a new completion segment for the company. As such, references made to 2024 will include IWS's financial results, whereas 2023 will not.
Speaker Change: Paython generated $105.9 million in revenue in the third quarter, a 14% improvement from the $93.1 million generated in the third quarter of 2023, despite a 5% reduction in North American industry drilling activity in that same period.
Speaker Change: I'll start with an overview of segment performance for the quarter.
Speaker Change: Against a challenging industry activity backdrop, particularly in the U.S., Payson's North American Drilling Business Unit generated revenue per industry day of $1,058, a new record level and a 9% increase from the third quarter of 2023.
Speaker Change: As a result, outpacing the 5% reduction in industry drilling activity, the North American drilling segment generated revenue of $74.1 million in the third quarter of 2024, which was 3% higher than the third quarter of 2023.
Speaker Change: The segment's cost base remains mostly fixed in nature and saw lower repair expenses in the third quarter, while depreciation and amortization expenses grew year-over-year with increased capital expenditures recently.
Speaker Change: The resulting segment gross profit of $45.5 million in the third quarter of 2024 was 3% higher than the $44.2 million generated in the third quarter of last year.
Speaker Change: Our international drilling segment generated $15.3 million in quarterly revenue, a level consistent with prior year, with stable industry activity and continued strength in our competitive position in international end markets.
Speaker Change: The segment also carries a mostly fixed cost base and saw slightly higher depreciation and amortization in Q3 of 2024, with resulting gross profit of $7.6 million compared to $7.9 million in the third quarter of 2023.
Speaker Change: Our completion segment includes results from Intelligent Wellhead Systems, a completions technology business that we fully acquired and began consolidating on January 1st, 2024.
Speaker Change: compared to 29 active jobs and revenue per IWS day of $5,108 in the second quarter of this year.
Speaker Change: The decline quarter-over-quarter is driven by reductions in completions activity from existing customers, with new customer additions offsetting some of these declines. Reported revenue for the segment was $12.5 million.
Speaker Change: Energy Tool Base, which is reported within our solar and energy storage segment, generated 3.9 million dollars in quarterly revenue, a decline of 30% from the 2023 comparative period, with the timing on deliveries of control system sales driving the difference year over year.
Speaker Change: The segment's revenue will continue to fluctuate with timing of these deliveries going forward.
Speaker Change: Sequentially, Payphone's results benefited from the seasonal improvements in Canadian drilling activity coming out of spring breakup, and also from a 7% increase in revenue per industry day quarter over quarter.
Speaker Change: These improvements more than offset the continued decline seen in U.S. drilling and completions activity from Q2 to Q3, and revenue increased by 10 percent, or $10 million, from $95.9 million in the second quarter of 2024 to $105.9 million in the third quarter.
Speaker Change: Highlighting the fixed cost nature of the business, adjusted EBITDA grew by $11 million quarter over quarter, while revenue grew by $10 million.
Speaker Change: Consolidated Adjusted EBITDA in the third quarter of 2024 was $44.1 million or 41.7% of revenue compared to $42.3 million or 45.4% of revenue in the third quarter of 2023.
Speaker Change: While Adjusted EBITDA in absolute dollars highlights the operating leverage of Payson's business on its mostly fixed cost base, a comparison of Adjusted EBITDA margin reflects the addition of lower margin revenue from IWS in 2024 given its current state of maturity and growth.
Speaker Change: We will continue to make the necessary investments in our cost base to deliver on further revenue growth and create opportunities for long-term free cash flow generations.
Speaker Change: Depreciation and advertisement for the company has increased from $7 million in the third quarter of 2023 to $13.7 million in the current quarter.
Speaker Change: This increase is attributable to higher levels of capital expenditures in recent quarters with growth-related investments within our newly acquired completion segment, along with the depreciation and amortization associated with the fixed asset and intangibles capitalized as part of the IWS acquisition on January 1st of this year.
Speaker Change: Further, as a result of the lower average cash balances during the current quarter and a declining interest rate environment in Canada, Payphone saw lower levels of interest income in the third quarter of 2024 in comparison to the prior year of comparative period.
Speaker Change: Resulting net income attributable to Payson for the three months ended September 30, 2024 with $24.2 million, or $0.30 per share, compared to $27.7 million, or $0.35 per share generated in the third quarter of 2023.
Speaker Change: Our balance sheet remains strong and coupled with our free cash flow generation allows us to make growth related investments while returning meaningful levels of cash to shareholders.
Speaker Change: Net capital expenditures in the third quarter of 2024 totaled $13.7 million, which included the addition of capital expenditures for IWS's business as we make investments to build out their fleet of rental assets.
Speaker Change: Free cash flow in the third quarter of 2024 was $16.7 million, compared to $25 million in the third quarter of 2023.
Speaker Change: With this free cash flow, we returned $11.3 million to shareholders through our quarterly dividend and share repurchase program and ended the quarter with total cash, including short-term investments, of $73.9 million and no interest-bearing debt.
Speaker Change: In summary, we continue to be well positioned for growth with our established and resilient position within drilling and our growing position in completions and solar and energy storage. I will now turn the call over to John for his comments on our outlook.
Thank you, Celine.
John Faber: Consolidated revenue in the quarter was 14% higher than the prior year period, despite North American land drilling activity being down 5% over the same period.
Speaker Change: Our North American drilling segment continues to hold a strong competitive position evidenced by revenue per industry day of $1,058 in the quarter, up 9% compared to the third quarter of 2023.
Speaker Change: In our international drilling segment, revenue was unchanged from the prior year period.
Speaker Change: Our Completions business posted revenue of $12.5 million in the quarter, with the sequential revenue decline mirroring the decline in the reported number of active frac spreads in the quarter.
Revenue for IWS Day remains strong at $4,868.
Speaker Change: While IWS has been disproportionately exposed to the effects of a challenging natural gas market and significant M&A activity in the E&P sector, IWS continues to enjoy high retention rates of existing customers while adding new customers.
Speaker Change: Given its stage of development, IWS is much more sensitive to customer mix and changes in the activity of specific customers than our drilling related business where our financial results are much more strongly correlated to overall industry activity given our substantial market share.
Speaker Change: ETB posted revenue of $3.9 million in the third quarter, up 24% sequentially from the second quarter, driven primarily by the sales of additional control systems.
Speaker Change: As a reminder, quarterly revenue for ETB will fluctuate as a result of timing of control system deliveries, and the year-over-year decline in ETB reflects the higher number of deliveries in the third quarter of 2023.
Speaker Change: Energy Toolbase continues to see strong growth in its bookings and its pipeline of sales opportunities for energy management control systems.
Speaker Change: Payson generated 44 million dollars in adjusted EBITDA in the third quarter. Sequentially, adjusted EBITDA increased by 11 million dollars while revenue increased by 10 million dollars.
Speaker Change: We expect that North American land drilling activity will remain near current levels in the remainder of 2024 before beginning to increase in 2025 with completions activity following a similar trajectory.
Speaker Change: While Payson would benefit from growing North American land drilling activity, our ability to deliver meaningful growth and strong financial results is not fully dependent on higher activity levels.
Speaker Change: As customers continue to deploy data-driven automation and analytics technologies in their operations, our drilling and completions related businesses stand to benefit.
Speaker Change: Our innovative new drilling mud analyzer provides continuous real-time readings of critical drilling mud parameters, and we are seeing higher adoption of our automation products.
Speaker Change: Our well site automation products provide valuable safety and efficiency benefits for customers in their completions operations.
Speaker Change: And we are working closely with customers to develop compelling data aggregation and management solutions for the completions market, benefiting both operators and service companies.
Speaker Change: The gains that we have made in increasing North American revenue per industry day in our drilling segment and in expanding our customer base while maintaining a strong revenue per IWS day in our completions business
should translate into continued outperformance against industry conditions.
Speaker Change: Our demonstrated ability to outperform the underlying industry activity, coupled with our high operating leverage, should position us to deliver strong results if and when industry activity improves.
Speaker Change: Our priorities with respect to capital allocation remain focused on pursuing attractive growth opportunities while returning meaningful capital to shareholders.
Speaker Change: We will continue to pursue disciplined returns over time through our regular quarterly dividend, which we are maintaining at $0.13 per share.
Speaker Change: Outside of the regular dividend our primary focus remains making the necessary investments to position ourselves for higher levels of free cash flow in our drilling and completions related businesses.
Speaker Change: We expect capital expenditures in 2024 to total up to 70 million dollars down from our previous guidance of between 75 and 80 million dollars.
Speaker Change: We 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.
Speaker Change: Our balance sheet remains strong at September 30th We had 74 million dollars in total cash including short-term investments and positive working capital of 118 point 1 million dollars
Speaker Change: The strength of our business allows us to make the required investments to secure our position as the leading provider of drilling data and technologies, to pursue additional sources of revenue outside of oil and gas drilling, including completions and solar and energy storage, and to return meaningful capital to shareholders.
Speaker Change: and we would now be happy to take any questions that you might have.
Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: Should you have a question, please press the star followed by the number 1 on your touch tone phone.
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One moment please for your first question.
and the
Speaker Change: Your first question is from Keith Mackey from RBC. Please go ahead.
Hey, thanks and good morning.
Speaker Change: Good morning. Good morning. First, I wanted to start out on IWS. I know the growth hasn't quite been as strong as we would have thought at the beginning of the year, and certainly the market has played into that. But, John, your comment around the near-term activity remaining close to where we are now, I'm just curious.
Speaker Change: you know, where your confidence in that statement comes from. Certainly, we're hearing a lot about E&P budget exhaustion, you know, around the Thanksgiving time frame in the U.S.
Speaker Change: So, just curious for some comments around that. And the second part of the question is the longer-term potential for IWS growth on the completion side, you know, are you still confident that that business or that market can ultimately be the size of your drilling business?
Thanks Keith, so I'll take those
Speaker Change: For the remainder of the year, I think your comments around...
Speaker Change: The impacts of budget exhaustion on the completions market as it relates to the drilling market are probably somewhat consistent with how we would see it. So, I'd say there probably is a chance that the completions market is a little softer than drilling would be in the remainder of the year, but we don't expect it will be significantly disconnected from what we would see on the drilling side.
Speaker Change: As it relates to our confidence in the IWS business, our confidence is actually probably higher today than it might have been historically in terms of the opportunities for that business.
Speaker Change: Your point is quite consistent with how we would see it in terms of 2024. The second half has been a little slower than we would have originally anticipated. We anticipated that existing customers would maintain or maybe increase their activity levels and they would layer on new customers.
Speaker Change: What's played out, of course, is that existing customers have slowed their activity a little bit as they've gone through M&A activity and through some...
the effects of the natural gas environment and so
Speaker Change: We feel quite confident going into 2025 that some of that work comes back as people sort of complete their M&A transactions and we're quite encouraged by the
Speaker Change: opportunities we're seeing with additional customers in that market. So we're quite confident in that business. It's a question of time, as we think we would have said previously, it's much more of a question around the timing of the revenue as opposed to confidence in the deliverability of the revenue.
Okay, copy that.
Speaker Change: One more on general drilling and completion efficiencies, and you touched a little bit on that in your prepared remarks, John, but certainly we're hearing more and more about
Speaker Change: E&P is looking to get more efficient and that's historically been seen as a negative for the service industry as it potentially shrinks the market. So, for your business today, John, where do you see the drilling and completion opportunities or drilling and completion efficiencies on an opportunity versus threat?
Speaker Change: basis, and any comments you can give as to why would also be helpful.
Speaker Change: Yeah, sure. I think maybe this comment is about the drilling market a number of years ago, and so maybe it applies in the completions market slightly more go forward.
Speaker Change: to be more of a threat than an opportunity. But what we've of course discovered in the experience in the drilling side and the way we're seeing the completion side starting to unfold...
Speaker Change: is that a lot of those efficiency gains are actually coming from increased use of technology and those technologies rely on data.
And so our ability to...
Speaker Change: participate in the efficiency and to generate revenue opportunities as a driver of efficiency rather than simply being a victim of efficiency. It's certainly how it's played out on the drilling side and we think the same opportunities are going to show up on the completion side where the use of technology is in much earlier innings than what we see in drilling today.
Okay, thank you. I'll leave it there.
Perfect, thanks Keith.
Speaker Change: Your next question is from John Gibson from BMO Capital Markets. Please go ahead.
John Gibson: Morning and congrats on the nice quarter here. My one question is on on revenue per revenue per day. Obviously nice to see it reach a new record.
John Gibson: Is it being driven by product rollouts or pricing or a combination of both, I guess?
John Gibson: what are the main drivers of it? And then as we think into 2025, I know you've talked down the growth expectation a little bit, but like why, I guess what's stopping it from growing it up same clip into next year?
Speaker Change: So, I think your question, if I interpret it correctly, John, relates more to the Revenue for Industry Day on the drilling side. That has been much more from the adoption of products, more so than pricing. Pricing has been a contributing factor, but it's been much more on the adoption of additional products. It goes a little bit back to the earlier question there around the increasing use of technology that requires data helps us.
Speaker Change: and people are using more of the products. Now, because price is one of the factors that does contribute, our experience has always been that it's, you know, pricing is a little bit easier to affect in stronger markets as opposed to markets that are, you know, flat to softer.
Speaker Change: And so the opportunities on the pricing side might be a little bit more challenged in the current environment and that'll play out over run rate effects as you go into 2025.
Speaker Change: We still see growing demand for products in terms of adoption on the Revenue for Industry Day side contribution, so we do think it continues to grow into next year, but it's probably going to even be more on the adoption side than kind of a mix of the two in 2025 than we would have seen in 2024.
Speaker Change: I guess if we extrapolate then, it seems like the new products you're rolling out are at higher day rates on average than your existing set. I guess, how do we think about that longer term impact on the overall number?
Speaker Change: Well clearly one of the products that we talk about a reasonable amount is the Mud Analyzer which is a much higher day rate than many of our other products and so you know as you start to see increasing adoption of the Mud Analyzer it doesn't take significant adoption rates to to make an impact on revenue per industry day.
Speaker Change: You would have heard us previously say that over the last decade we've delivered a six to seven percent CAGR on that revenue per industry day metric and and that's the level that we feel quite confident on being able to deliver going forward and I would say nothing's changed in that context.
Okay, great.
Appreciate the comments and I'll turn it back.
Thank you, John.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question please press the star key followed by the number one.
Your next question is from Keith Mackey
Keith, we're not hearing you if you've got a question.
Sorry, I was muted.
I'm back.
Speaker Change: Just one more question, on the mud analyzer, what sort of contribution might that product have had in the revenue per industry day growth on the drilling side year over year and can you just talk a little bit more about the rollout and adoption for that product over the next year, what does it look like, what are some of the maybe key milestones?
Speaker Change: Sure, happy to. So it wouldn't have had a very significant impact on the revenue for Industry Day in this quarter. Obviously we do have some revenue contribution from that product in the quarter, and so it's not no contribution, but it's not particularly significant at this stage. It's probably useful to remind folks, Keith, that as we think about the money analyzer, you almost need to think about we have a technology partner in that product.
Speaker Change: And then there's kind of all other customers. The technology partner is very motivated to have the technology on all of their job sites, including the job sites of recent acquisitions. And so that will certainly drive additional adoption of units.
Speaker Change: Now, that comes at a lower data rate, at least for a period of time under kind of the arrangement we have as a technology partnership.
Speaker Change: and on the other side, I'll say all other customers. We're continuing to grow both the number of active jobs and the number of active customers that we're working with there.
Speaker Change: and I would say there one of the discoveries as we roll it out is that there's differences between the completions operations and
Speaker Change: of some of the other companies relative to the way the technology partner might do things.
Speaker Change: And so as we discover some of those differences, it does require some adaptation of the product. It does require some additional training of personnel at companies that may be less familiar with the technology. We are standing up some additional support to help customers who are using the technology for the first time.
Speaker Change: understand how to fully utilize both the technology and the data that comes from it, and we're spending a bit of money to really adapt the technology or the device analyzer to cold climates.
Speaker Change: because we've had some interest to go into some other geographies with the Mud Analyzer, and it does require some adaptation for cold climates as well.
Speaker Change: Got it. And just how is the progress going on the cold climate adaptions? That's something you might be able to roll out in the next couple quarters?
Speaker Change: Yes, so it's from a technical perspective. It's it's certainly kind of established how we do it It's more of a process of now building them out and that building is happening now, so we do have Units that are available for cold climates will continue to increase the number that are available, but there will certainly be
Speaker Change: and the other is available for deployment in short order. Which of course is timely because, you know, cold climate and certainly where we're coming from today in Calgary, it's not that far away, so we need to be ready for that.
Okay, thanks very much.
Yeah, thanks Keith.
Speaker Change: Ladies and gentlemen as a reminder should you have any questions please press the star key followed by the number one.
Oh
Speaker Change: There are no further questions at this time. Please proceed with closing remarks.
Speaker Change: Thanks very much, Andrew, and thanks to all those who have joined the call today. We certainly appreciate your interest and your questions. If you have any other further questions, don't hesitate to reach out to Celine or myself, and we'll look forward to talking to you at the end of the fourth quarter and with our full year results at the end of February. Thanks very much for your time.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.