Pason Systems Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2023

There are 3 speakers on the call.

Operator

Morning. My name is Ina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pason Systems Inc. 2nd Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, The contents of today's call are protected by copyright and may not be reproduced without the prior written consent of Pason Systems Inc. Please note that the advisory is located at the end of the press release issued by Pason 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 Pason Systems, including the risk factors relevant to the company can be found in its annual information form. Thank you.

Operator

Celine Boston, CFO. You may now begin your conference.

Speaker 1

Thank you, operator. Good morning, everyone. Thank you for attending Pason's 2023 Second Quarter Conference Call. I'm joined on today's call by John Faber, our President and CEO. I'll start today's call with an overview of our financial performance in the Q2.

Speaker 1

Dawn will then provide a brief perspective on the outlook for the industry and for Pason and we'll then take questions. I'm pleased to report on Pason's Q2 2023 results, which highlights the company's ability to deliver on strong financial performance despite a modest decline in activity levels. Pason generated consolidated revenue of $84,700,000 in the Q2 of 2023, a 15% improvement over the Q2 of 2022. With this revenue, Pason generated $37,900,000 in adjusted EBITDA, which represented 44.7 percent of revenue and an increase of 22% from the $31,000,000 generated in the Q2 of 2022, which represented 42.1 percent of revenue in that period. All of the company's business segments contributed to this quarterly results.

Speaker 1

Compared to the Q2 of 2022, our North American segment grew both revenue and gross profit despite industry activity declining by 1% year over year. The business unit generated revenue per industry day of $9.10 in the Q2 of this year, representing the 2nd time in Pason's history that this metric surpassed $900 a 14% 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. Resulting North American revenue was $67,300,000 in the 2nd quarter, a 13% increase from the Q2 of 2022 while segment gross profit increased by 11%. Similarly, revenue generated per day in our international end markets also improved year over year.

Speaker 1

The business unit also benefited from stronger industry activity key end markets and favorable foreign exchange rates for U. S. Dollar linked contracts. Revenue generated by the international business unit dollars 15,000,000 in the Q2, a 22% improvement from the Q2 of 2022. Segment gross profit was $7,200,000 in the Q2 2023, a 34% increase from the $5,400,000 generated in the Q2 of 2022.

Speaker 1

Energy Toolbase continues to grow its presence in the solar and energy storage industry and generated $2,400,000 in quarterly revenue, a 44% improvement from the same quarter in 2022. Sequentially, Canadian rig count sell through spring breakup before beginning to recover at the end of the second quarter and U. S. Rig counts trended down approximately 100 land rigs or roughly 12% in the Q2. Given our leading competitive position in the North American end market, consolidated revenues largely followed suit and decreased sequentially from $98,000,000 in the Q1 to $84,700,000 in the second quarter.

Speaker 1

Following the reduction in revenue with company's mostly fixed cost structure. Adjusted EBITDA of $37,900,000 in the second quarter decreased from the $52,400,000 seen in the Q1 of 2023. Our Q2 results continue to highlight our mostly fixed cost base. Of note, our rental services costs, which represent the largest operating cost category within the business and represented in excess of 60% in the Q2 of 2022 Have increased by less than 1% since the Q3 of 2022 despite inflationary impacts and a stronger U. S.

Speaker 1

Dollar. In that same time period, revenue per industry day has grown by 4.5%. We will continue to manage our fixed cost structure along with changes in foreign exchange and the relative mix of rigs within our end markets could have an impact on quarterly margins in the coming quarters. Net income attributable to Pason for the 3 months ended June 30, 2023 was $25,500,000 or $0.32 per share, a 37% increase from the $18,500,000 or $0.23 per share generated in the Q2 of 2022. Net income in the Q1 of 2023 benefited from higher levels of interest income earned on the company's invested cash and cash equivalents, along with slightly lower stock based compensation expense, which reflects the mark to market on the company's cash settled stock based compensation plans.

Speaker 1

Year to date, Pason generated $182,900,000 in revenue, a 24% increase year over year. Adjusted EBITDA for the 6 months ended June 30, 2023 was $90,300,000 or 49 percent of revenue compared to $64,300,000 or 43 percent of revenue for the 1st 6 months of 2022. Accordingly, net income attributable to Pason in the 1st 6 months 2023 was $61,300,000 or $0.76 per share, up from $37,100,000 or $0.45 per share. A comparison of year to date results highlights the improved industry conditions in the Q1, higher levels of revenue generated per operating day in 2023 and strong operating leverage. Our balance sheet remains strong and incredibly well positioned to make strategic investments while returning meaningful cash flow shareholders.

Speaker 1

Pason generated $29,700,000 in cash flow from operations in the Q2, a 15% increase from the Q2 of 2022. In the Q2, Pason spent $11,700,000 in net capital expenditures in support of our core business, representing the ongoing refresh of our technology platform and the maintenance of our fleet and also representing an element of and the maintenance of our fleet and also representing an element of catch up from lower levels of capital expenditures in 2020 2021. Also in the Q2, we approved and funded $5,000,000 of the $15,000,000 that was remaining under the company's preferred share financing agreement with Intelligent Wellhead Systems and further funded another $5,000,000 subsequent to quarter end. We remain committed to shareholder returns And in the second quarter returned $16,600,000 to shareholders through dividends and share repurchases. We ended the quarter with no interest bearing debt and $175,000,000 in total cash.

Speaker 1

I will now turn the call over to John for his comments on our outlook.

Speaker 2

Thank you, Selene. Our 2nd quarter financial results again demonstrated our ability to generate results that outpace underlying drilling industry activity. The year over year increases in consolidated revenue and adjusted EBITDA of 15% and 22%, respectively, were significantly ahead of the 1% decrease in industry activity. Our North American revenue per Industry Day came in at $9.10 during the quarter, a 14% increase during the same period of 2022. We maintained our leading market share position while seeing increases in product adoption and improved price realization, both of which we expect to see continue going forward.

Speaker 2

Our international business unit posted a 22% increase from the prior year period, benefiting from increased industry activity and strong increases in revenue per EDR Day. Energy toolbase revenue increased by 44% year over year due to the installation of additional energy storage control systems and growth in revenue from our economic modeling software tool. We remain focused on maintaining appropriate control over our operating Capital costs, while ensuring that we strengthen our capabilities in areas that directly impact our service and technology advantages and provide capacity for additional revenue growth. Our outlook for a return of steady growth in North American industry activity in the second half of After declining steadily through the first half of the year, we expect North American land rig counts to plateau near current levels before beginning to steadily increase through the end of 2023 and into 2024. Ultimately, the economic forces of Supply and demand established the prevailing direction of industry activity.

Speaker 2

Global oil demand continues to exceed pre pandemic levels, While all sources of supply, including storage, production, the inventory of drilled but uncompleted wells and drilling activity remain below pre pandemic levels. Any efforts to increase supply will require additional drilling activity and as such, Our outlook for continued growth in land drilling remains positive. Pason 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, throughputs and speeds of data and additional data transmission and storage protocols.

Speaker 2

We continue to expect capital spending of approximately $45,000,000 in 2023 As we renew and extend the capabilities of important parts of our hosting platform, we also continue to make investments in our operational assets, We continue to evaluate our capital program with a focus on supporting 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 is encouraging. We will support the required investments in working capital and capital expenditures to ensure that IWS is positioned to fully capitalize on these opportunities. During the Q2, we funded $5,000,000 as part of our previously announced preferred share financing arrangement with IWS with a further $5,000,000 deployed early in the Q3.

Speaker 2

Energy tool base is also showing positive momentum. Demand for energy storage is growing as government policies incentivize the deployment of additional energy storage assets. We are adapting our approach to the sales of our intelligent energy management control systems to leverage Energy Toolbase's strong brand position to further build our pipeline of Control Systems Opportunities. We are also expanding the functionality of our economic modeling software tool to support higher price realization And to handle the unique requirements of additional markets. We remain committed to returning capital to shareholders through our regularly quarterly dividend and through share repurchases.

Speaker 2

We returned $36,400,000 to shareholders in the first half of twenty twenty three compared to $52,700,000 in free cash flow generated over the period, and we are maintaining our quarterly dividend of $0.12 per share. Our balance sheet remains strong with cash and short term investments of $175,000,000 and no debt. 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 the oil and gas drilling market and to return meaningful capital to shareholders. Our demonstrated ability to generate revenue growth that outpaces the growth in underlying drilling 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 Tollbase and Intelligent Wellhead Systems Gives us confidence in even greater growth in the future.

Speaker 2

We remain focused on ensuring that Pason is an innovative, profitable and responsible company. And we would now be happy to take any questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a 3 tone prompt acknowledging your request. Questions will be taken in the order received. Mr.

Operator

Faber, there are no questions at this time. Please proceed.

Speaker 2

Terrific. Thank you, operator, and thanks for taking the time to join us this morning. If you do have questions following the call, you can certainly reach out to Celine or myself at any point. We would be happy to answer questions that you might have. We appreciate your continued support and interest, and we look forward to speaking to you with the release of our Q3 results.

Speaker 2

Have a great day.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all

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Key Takeaways

  • Pason reported Q2 2023 revenue of $84.7 million (+15% y/y) and adjusted EBITDA of $37.9 million (44.7% margin, +22% y/y) despite a 1% decline in global drilling activity.
  • In North America, revenue per industry day reached $9.10 (+14% y/y)—only the second time above $900/day—driving a 13% increase in segment revenue and an 11% rise in gross profit.
  • The international unit delivered 22% revenue growth to $15.0 million with a 34% jump in gross profit, while Energy Toolbase surged 44% y/y on strong solar and energy storage demand.
  • The balance sheet remains robust with $175 million cash, no debt, $29.7 million in Q2 operating cash flow and $16.6 million returned to shareholders through dividends and buybacks.
  • Looking ahead, Pason expects North American rig counts to plateau then rise into 2024, plans ~$45 million capex for 2023, and is investing in growth initiatives like Intelligent Wellhead Systems and Energy Toolbase.
A.I. generated. May contain errors.
Earnings Conference Call
Pason Systems Q2 2023
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