Q4 2024 Pason Systems Inc Earnings Call
The contents of today's call are protected by copyright and may not be reproduced without the prior written consent of Payson Systems, Inc. Please note, the advisory is located at the end of the press release issued by Payson Systems yesterday, which describe forward-looking information.
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Celean Boston: Celean Boston CFO you may begin your conference.
Speaker Change: Thank you Andrew.
Speaker Change: Good morning, everyone and thank you for attending piece on the 'twenty 'twenty four fourth quarter conference call I'm joined on today's call by Jon Faber, our president and CEO.
Speaker Change: I'll start today's call with an overview of our financial performance in the fourth quarter. John will then provide a brief perspective on the outlook for the industry and for pace on and we'll then take questions.
Speaker Change: I'm very pleased to report on paid SUNS fourth quarter and full year 2024 results, which demonstrate the incorporation of our new completions segment, the resilience in our drilling segments and growth in our solar and energy storage segment.
Speaker Change: As a reminder to listeners piece on acquired and began consolidating intelligent wellhead systems or AWS on January 1st of 2020 for creating a new completions segment for the company.
Speaker Change: Such reference made to 2024 will include out of U S financial results, whereas 2023 will not.
Speaker Change: In 2024 pesos generated $414 million in consolidated revenue a result that was 12% higher than revenue generated in 2023.
Speaker Change: Through a 10% decline in industry activity year over year pace on North American drilling segment generated annual revenue of $283 million. A result that was only 2% lower than the prior year.
Speaker Change: Based on the annual revenue per industry days grew by 8% from 2023 and with a new annual record for the company at a $1000 and twenty-five your continued gains in product adoption and improved price realization.
Speaker Change: Athens newly acquired completion segment generated $52 $6 million in revenue in 2024% to 15% increase from the revenue out of U S generated in the 2023 prior to being consolidated and pay downs results and that significantly outpaced the 10% decline seen in active frac spreads in the U S.
Speaker Change: Adjusted EBITDA in 2024 was $161 8 million or 39, 1% of revenue compared to $171 5 million or 46, 4% in 2023.
Speaker Change: Revenue growth in 2024 coming from earlier stage segments, such as completions in solar and energy storage is at lower margin levels than pay SUNS drilling segments would be investments made for their current stage of growth.
Speaker Change: Further within drilling segments lower industry activity levels over a mostly fixed cost base impacted margins in 2024.
Speaker Change: Net income attributable to pay for them for the year was $121 $5 million or $1 53 per share and included a $58 million noncash accounting gain relating to the acquisition of AWS.
Speaker Change: Okay.
Speaker Change: From a quarterly perspective pay some generated a consolidated revenue of $107 $6 million in the fourth quarter of 2024 compared to $93 3 million in the fourth quarter of 2023 with this revenue pace on generated $42 $1 million and adjusted EBITDA or 39, 1% of revenue.
Speaker Change: I'll now provide an overview of the fourth quarter by business unit.
Speaker Change: Against the challenging industry activity backdrop, particularly in the U S pay zones, North American drilling business unit generated revenue for industry day, a thousand dollars, 46% to 5% increase from the fourth quarter of 2023 as.
Speaker Change: As a result, outpacing the 3% reduction in industry drilling activity in North American drilling segment generated revenue of $71 $8 million in the fourth quarter of 2024, which was 2% higher than the fourth quarter of 2023.
Speaker Change: The segment's cost base remains mostly fixed in nature, and so lower repair expenses in the fourth quarter, while depreciation and amortization expenses grew year over year with increased capital expenditures recently.
Speaker Change: Further strength in the U S dollar versus the Canadian dollar in the fourth quarter of 2024 impacted U S dollar sourced revenue and expenses for the segment.
Speaker Change: <unk> segment gross profit profit of $43 $4 million in the fourth quarter of 2024 was 4% higher than the $41 $5 million generated in the fourth quarter of last year, highlighting the segment's operating leverage.
Speaker Change: Our international drilling segment generated $15 million in quarterly revenue and $6 $5 million in segment gross profit in the fourth quarter.
Speaker Change: Prior year Q4 revenue and segment gross profit benefited from inflationary and foreign exchange factors with the significant devaluation as seen in the Argentinian peso in that period.
Speaker Change: In our completion segment IW Les had 26 active jobs and revenue for IW last day of $5668 through very challenging industry conditions in the fourth quarter of 2024, I'll remind listeners that revenue per item USA will fluctuate depending on the mix of technology adopted amongst existing customers.
Speaker Change: And further will be impacted by foreign exchange fluctuations with the U S and Canadian dollar.
Speaker Change: Ported revenue for the segment was $13 $6 million up from $12 5 million in the third quarter of 2020 for.
Speaker Change: Gross profit for the segment of $8 million represents operating expense investments made for the segments current stage of growth along with $5 $5 million in depreciation and amortization expense associated with the property and equipment and intangible assets acquired on January one 2024.
Speaker Change: Energy tool base, which is reported within our solar and energy storage segment generated $7 $2 million in quarterly revenue, a new quarterly record and an increase of 49% from the 2023 comparative period with the timing on deliveries of control system is 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 revenue growth in the company's completions and solar and energy storage segments offset the seasonal declines in industry drilling activity, leading up to the December holiday period.
Speaker Change: Revenue grew by 2% quarter over quarter as a result of that.
Speaker Change: EBITDA of $42 $1 million in the fourth quarter compared to $44 $1 million in the prior quarter and reflects the addition of lower margin revenue from IW Western energy tool base, given their current stage of maturity and growth.
Speaker Change: Depreciation and amortization for the company has increased from $78 million in the fourth quarter of 2023 to $13 $9 million in the current quarter. This increase is attributable to higher levels of capital expenditures in recent quarters with growth related investments within our completions segment, along with the depreciation and amortization associated with the fixed assets.
Speaker Change: And intangibles capitalized as part of the Iot That's acquisition on January one of this year net.
Speaker Change: Net income attributable to pace on for the three months ended December 31st 2024 was $16 $9 million or 21 per share compared to $8 $5 million or 11 cents per share generated in the fourth quarter of 2023.
Speaker Change: Our balance sheet remains very strong and coupled with our free cash flow generation allows us to make growth related investments, while returning meaningful levels of cash to shareholders. In 2024 net capital expenditures were $69 million, which now includes the addition of capital expenditures for AWS as business as we make investments to be.
Speaker Change: Their fleet of rental assets.
Speaker Change: Selecting these investments free cash flow in 2024 was $54 $1 million compared to 97 million in 2023.
Speaker Change: With this free cash flow, we returned $51 $4 million to shareholders through our quarterly dividend and share repurchase program and ended the quarter with total cash, including short term investments of $81 million and no interest bearing debt.
In summary, we continue to be well positioned for growth within our established and resilient positioned where they didn't 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.
John: Thank you Celine.
John: Our financial results for 2024 demonstrate the ability of our business to outperform industry activity.
John: Our North American drilling segment declined by 2% compared to a 10% decrease in North American land drilling activity.
John: North American revenue for industry day was $1025 for the year, an 8% increase from 2023, largely driven by increased product adoption and to a lesser extent improved price realization.
John: Revenue from our completion segment grew 15% from 2023 levels far outpacing a 10% decrease in the reported number of active frac spreads in the United States.
John: 25% outperformance.
John: In our international drilling segment reported revenue decreased by 6% in 2024 with 2023 results benefiting from inflationary and foreign exchange factors in Argentina.
John: Energy tool base revenue increased 15% year over year from 2023 levels.
John: Consolidated revenue for the year of $414 million was 12% higher than the prior year.
John: Adjusted EBITDA for the year totaled $162 million, representing an adjusted EBITDA margin of 39% margins.
John: Margins decreased from 2023 levels as a result of higher revenue contribution from the completions and solar and energy storage segments, where segment margins are lower at their current stage of development.
John: We do expect the margins in these segments to expand overtime as revenues increase.
John: Fourth quarter results for 2024, similarly demonstrated our ability to outpace industry activity, particularly in our North American drilling segment, where a 2% year over year increase in quarterly activity outpaced a 3% decrease in industry activity.
John: And in our completions segment, where a 9% sequential increase in revenue outpaced a 4% decrease in the number of active frac spreads in the United States in the quarter.
John: We currently expect that North American land drilling activity in 2025 will be similar to 2024 levels.
John: Completions industry activity for the year, maybe slightly lower owing to a stronger first half of 2024.
John: In that context, we expect piece on to continue to outpace industry activity and to deliver meaningful growth and strong financial results.
John: Both our drilling and completions businesses benefit from increasing complexity in drilling and completions operations.
John: As customers continue to pursue automation and analytics efforts, including leveraging artificial intelligence applications and the establishment of real time operating centers access to consistent reliable high quality data is increasingly important for both drilling and completions operations.
John: Based on his experience over more than four decades in serving the data needs of the drilling market provide us with the ability to make meaningful advancements in helping customers access data across the entire well construction process.
John: The games 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 I Ws day in our completions business.
John: Translate into continued outperformance against the industry conditions.
John: 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.
John: Our well site automation products provide valuable safety and efficiency benefits for completion of our customers and their completions operations.
John: And we're working closely with customers to develop compelling data management solutions for the completions market benefiting both operators and service companies.
John: Strong bookings of control systems in our solar and energy storage segment. In 2024, four are expected to translate into further revenue gains in 2025.
John: Our capital allocation priorities are driven by a focus on return on invested capital.
John: Today, our highest expected returns on capital will come from the organic investments, we're making to continue the growth of our completion segment, coupled with the ongoing rollout of the mud analyzer in our drilling related business.
John: In 2025, we expect to spend approximately $65 million in capital expenditures.
John: We will continue to pursue disciplined shareholder returns over time through our regular quarterly dividend and share repurchases.
John: We aim to consistently deploy capital to share repurchases through market cycles, thus buying back a larger number of shares during periods of market weakness and less shares when the market is stronger.
John: We are maintaining our quarterly dividend of <unk> 13 per share and preserving flexibility to continue repurchasing shares in the current environment of uncertainty.
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.
John: Our balance sheet remained strong at December 31, we had $81 million in total cash, including short term investments and positive working capital of $121 million.
John: We would now be happy to take any questions.
John: Thank you.
John: Ladies and gentlemen, we will now begin the question and answer session.
John: Should you have a question. Please press the star followed by the number one on your Touchtone phone.
John: You'll hear a prompt that you haven't been raised.
John: Should you wish to decline from the polling process. Please press the star followed by the number too.
John: If you are using a speaker phone please lift the handset before pressing any keys.
John: One moment. Please for your first question.
John: Your first question is from Keith <unk> from RBC capital markets. Please go ahead.
John: Hey, good morning.
John: Okay.
John: Morning.
John: Just curious about the completion segment.
John: Can you just talk a little bit more about what where you are in terms of the rollout of <unk>.
John: AWS business and ultimately what needs to happen to see the the margin inflection that you talked about there are in your prepared remarks John.
Speaker Change: Sure Keith in terms of the rollout of where we are in the completion segment. It's still fairly early days in the completions market for this type of technology right. So we would continue to estimate that the rollout of this technology is probably somewhere in the order of 25% to 30% of the overall market for all providers of this type of technology.
Speaker Change: Our best information would suggest that our completion segment would have the largest share of that.
Speaker Change: A portion of the market, but there's still a long ways to go in terms of overall market adoption. We certainly have a number of customers who are using the technology across all or most of their completions operations.
Speaker Change: But we have some customers who are continuing to roll it out within their various operations and then of course, we're continuing to add new customers around that so in terms of the rollout there's or what needs to happen in extra revenues continue to grow I guess, there's the overall market needs to continue adopting more some of the existing customers who aren't using it on all of their operations, yet continuing to adopt it across.
Speaker Change: More of their fleets and then continuing to add new customers well, let saline comment on the trajectory of margins and sort of what it would take to get to similar margins, we see on the drilling side.
Speaker Change: Yeah. So I mean, a couple of dynamics that Keith as you know one is we're investing in advance of the revenue showing up that cost base on the completion side would be much like what youre used to seeing on the drilling side and that it's mostly fixed in nature you have to make those investments in advance of that revenue growth showing up and then the second part is that the business is just not fully at scale, yet so I would say adds.
Speaker Change: We continue to believe that the completion segment is capable of generating trailing like margins, but it's going to take a little bit of time to get there.
Speaker Change: I guess, maybe the other comment I would just quickly add Keith when you talked about kind of continue to come back we talked a lot in 2024, if you recall, though some of the headwinds that that segment would have seen in terms of natural gas prices and also customers involved in M&A transactions, we think that kind of normalizes through 2025. So we think that would help on the.
Speaker Change: Activity side.
Speaker Change: If we look at the fourth quarter. The completions segment that I think the performance of that segment was a bit of an outlier relative to other north American completions providers.
Speaker Change: Which is an indication of the continued ability to gain new customers and see some of those customers are increasing their activity.
Speaker Change: Got it. Thanks, Thanks for that color, maybe just secondly on on capital allocation, you talked about $65 million capital program.
Speaker Change: Maybe discuss a little bit about where that where that is going to be allocated between maintenance and then the completions growth versus you get versus the blood analyzer.
Speaker Change: Yeah, as you know Keith it's difficult for us to completely bifurcate between maintenance and expansion because a lot of capex that we that we incur on any given year is related to the refresh of our ongoing technology platform and our drilling infrastructure in our drilling business and you know, although there are parts of the technology that we have to.
Speaker Change: Update and refresh it also allows us to do more with that technology, and and and it's it's more capable in the context of more capabilities for our customers, which potentially results in and in higher price there are opportunities to improve prices and do you think about the breakdown of the $65 million, a roughly $40 million will be allocated towards drilling some of that would be.
Speaker Change: Maintenance type items like trucks for our field technicians and other day to day expenditures and then the other piece would be that refresh of our technology platform that I talked about it and then also the ongoing build out of our mud analyzer, and then roughly 25 million will be allocated towards our completion segment and that's the continued build out of the the valve management and automation technology.
Speaker Change: Okay got it thanks, so much.
Speaker Change: Okay. Thanks Keith.
Speaker Change: Your next question is from Aaron Macneil from TD Cowen. Please go ahead.
Aaron MacNeil: Hey, good morning, all and thanks for taking my questions. This morning.
Speaker Change: Building on Keith's first question.
And I can appreciate market conditions are pretty tough, but can you speak to the pace of customer acquisition at AWS like.
Speaker Change: New customers are you starting to grow again with existing customers like what sort of that dynamic look like.
Speaker Change: Well I guess at a high level I would say the adding new customers has actually been ahead of our expectations, even through 2024, where we would've seen a softer than we expected in 2024 was actually existing customers slowing their own activity low and so the challenge in 2024, what was that if a customer who is working on.
Speaker Change: You can make the numbers five or six jobs [noise] wood wood.
Speaker Change: It could slow down to two or three I E slowed down by two or three jobs you didn't have to find two or three new customers to each take one new job each other they trial the equipment. So there's there's kind of timing differences between those commercial endeavors, but the addition of new customers has actually gone very well through 2024 next continues to go.
Speaker Change: Very well so we're very encouraged about that and in some cases on with these M&A transactions.
Speaker Change: We are now installing on the assets.
Speaker Change: Assets are the fleets of the acquired companies and so that wouldn't be direct new customer acquisition, but exposure to a fleet that we might not have otherwise been on before so the new customer acquisition is going very well, it's just when you're requiring new customers. It tends to come one job at a time when the trial and then scale from there and when customers slow down activity that can come in.
Speaker Change: In mortgage to three floor at a time.
Speaker Change: Gotcha, Okay and similar question on the mud analyzer, just can you speak to its performance relative to I guess your own internal and customer expectations.
Speaker Change: You know the potential appetite might be for you.
Speaker Change: No other customers that might have to pay the full rate now that you've sort of got some operating in the field.
Speaker Change: Yeah. So the Budweiser is going quite well relative to our initial expectations I think we've talked in previous.
Speaker Change: Calls are those affected for customers outside of our technology partner on their particular technology. They may be a little less familiar with the data feeds that are coming from the mud analyzer. There maybe some operational changes in their drilling operations to best utilize the technology and so that has been things that have slowed a little bit the adoption outside.
Speaker Change: The technology partner of the technology partners currently using it on all of their fleets, including our fleets of.
Speaker Change: Companies. They would've recently acquired so so that has gone very very well, we're growing the number of of other customers using the technology.
Speaker Change: Encouragingly, we are removing people from the first trial to their second trial on when companies that would have double digit number of active drilling rigs and so you know it's the most friction as always from zero to one.
You always have a reasonable amount of friction from one to two and then from two to three 3% to four and so on becomes less friction and so we're quite encouraged about the ability to expand into the growing the number with some of those customers who are now on kind of number two if you will on trajectory to a double digit types of rig fleets and then adding new customers is.
Speaker Change: Well, we're starting to use it for the first time, so it's going well there but.
Speaker Change: Now with all the fleets with the technology partner and so now it's continuing to grow with other companies for for growth on the advisory side.
Speaker Change: Gotcha, Okay, maybe I'll ask one more I don't want to leave out the ethylene are there any.
Speaker Change: Our target for 2025.
Speaker Change: In terms of capital allocation to the buyback like is there anything internally, even if you don't want to disclose it where you say, we're gonna put X dollars towards the buyback or do X number of shares.
Yeah, and I think for US the important is the discipline around the continuous repurchasing and we as John said in his comments, we see an opportunity today in light of ongoing uncertainty and what that potentially does for us from a stock market perspective to be to favorite the buyback over the dividend.
Speaker Change: But nothing concrete in terms of like that.
Speaker Change: Yeah.
Speaker Change: No I don't know that we'll be getting talking numbers that are fine fair enough. Thanks appreciate the time.
Speaker Change: You bet.
Speaker Change: Ladies and gentlemen, as a reminder, should you have any questions. Please press the star key followed by the number one.
Your next question is from John Gibson from BMO capital markets. Please go ahead.
Speaker Change: Good morning Al I, just wanted to follow on Aaron's question, maybe after differently I mean.
Speaker Change: Your valuation is compressed quite a bit there Alex.
Speaker Change: It's all in the U S and Canada, and you know you still build cash.
Speaker Change: Throughout 2024, I'm wondering if you could.
Speaker Change: I know it isn't there at.
Speaker Change: The old cash on the balance sheet, but wondering if you could look a little bit into that cash balance to wrap the buyback here in 2025.
Speaker Change: Well I think John it's been in our DNA to have more cash on the balance sheet in anticipation of.
Speaker Change: Having acquisition opportunities for changing the risk and growth profile of the company I E. The acquisition of AWS. So we would've carried quite a bit more cash in anticipation of the completion of the acquisition of the rest of AWS. We now carry quite a bit less cash. We continue to think it's a net cash business given the significant operating leverage of the business and we don't see that.
Speaker Change: Need for the cash balance to be higher than what it would be today. So then the question becomes where do the incremental capital dollars get spent theres a finite limit to the amount of capital you can put into organic investments are certainly at the pace at which you can make organic investments in order to get appropriate returns on those investments and so.
Speaker Change: We do think the number one use of capital today is continuing to grow the completions segment continuing to roll out more mud analyzers, but theres still surplus cash.
The dividend has been you know a profile of the company for a very very long time.
Speaker Change: And we've said that that will grow slowly and steadily over time. This quarter of course, we have maintained the dividend in recognition of the fact that in the current environment uncertainty incremental shareholder return dollars are better deployed to our repurchase program and then to the dividend side, but I don't think we see any need to to build cash the way the company would have historically done well.
Speaker Change: The ability to continue to grow the business as the first priority and then beyond that we would assume.
Speaker Change: So I would we would favor repurchases over incremental dividends in the current environment.
Speaker Change: Okay. That's fair it seems to me like you can kind of do it all here, especially.
Speaker Change: Where capex is that growth is added to that so.
Hum.
I guess, but thanks I appreciate the response.
Speaker Change: Okay. Thanks, John.
Speaker Change: Ladies and gentlemen, as a reminder, should you have any questions. Please press the star key followed by the number one.
Speaker Change: We will pause for any further questions.
Speaker Change: There are no further questions at this time. Please proceed with closing remarks.
Speaker Change: I appreciate everybody's time this morning, joining us for the call. We'll look forward to speaking with you again, when we release, our first quarter results, but if you have any questions in the meeting.
Speaker Change: Certainly don't hesitate to reach out to saline or myself. 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.
Speaker Change: Okay.